Will you soon be selling a house or apartment (or commercial) property for more than $750,000?
From 1 July 2017, all Australian residents selling real estate for more than $750,000 will need to apply for a ‘Clearance Certificate’ from the ATO.
Further revised withholding rules on sales of property by foreign residents have been introduced at a time when foreign investment in Australia, including in residential real estate, is increasing. Commonwealth Treasury figures show that off-shore buyers spent $72 billion on local real estate last financial year up from $60 billion in 2014/15.
The big recently announced change sees a drop in the trigger sales price down from $2 million to a much more modest $750,000.
The rules will apply where real property contracts are entered on or after 1 July 2017, and apply to sales of residential property with a market value of $750,000 or more. Withholding taxes does not apply to sales by Australian residents, but all sellers in the price bracket will need to obtain a Clearance Certificate that they must provide to the purchaser to avoid paying the 12.5% rate.
The requirements are not new, as the original changes were announced in 2013. The ATO has since educated real estate agents, conveyancers and legal practitioners to help their clients meet their withholding obligations, however the reduction to $750,000 will involve many more vendors.
Withholding arrangements are designed according to the Government, to make sure foreign residents pay capital gains tax on the sale of residential property. Similar rules exist in many countries, including in Canada, France, Spain, Japan and the USA. It’s a trend, that along with other taxation measures is gaining in popularity as many governments link such measures to possibly improving local housing affordability.
Wider Application of Foreign Sellers Capital Gains Tax
The wider application of the new rules will apply to many more properties than did the original threshold of $2 million. The revised withholding does not apply to sales by Australian residents where a Clearance Certificate is provided to the buyer, before settlement.
For purchases of property with a market value of $750,000 or more from a foreign resident seller, a 12.5% withholding will be incurred on these transactions at settlement with the withheld amount being credited against any capital gains or income tax payable by the seller on the particular sale.
This means Australian residents who are selling a taxable Australian property with a market value of $750,000 or more need to obtain a Clearance Certificate from the ATO, and this should be done early in the sales process to avoid any delays or tax liability.
The Clearance Certificate will confirm that the withholding amount does not apply to the transaction. If a seller doesn’t provide a clearance certificate to the buyer by settlement, the buyer will be required to withhold 12.5% of the sales price and pay this to the ATO, regardless of the sellers’ nationality.
Where a buyer fails to withhold amounts when they should, a penalty may be equal to the amount that was required to be withheld and paid. Interest will also be payable.
Sellers can claim the credit for the withheld amount paid to the ATO by lodging a tax return for the relevant year. Foreign resident capital gains withholding payments | Australian … – ATO
Clearance Certificate application forms are available to download through the ATO’s website, and it is designed to be a straightforward process that should not take much time to complete for most sellers.
Sellers can complete and lodge the form themselves, or it can be completed and lodged on their behalf by a third party, such as their solicitor or accountant.
There is no ATO fee for Clearance Certificate applications.
An online version of the form is available on-line. Where an application is submitted online, most certificates will be issued electronically within a few days. Paper applications may take up to 2-4 weeks to process. Clearance certificate application for Australian residents – ATO
Is There More ATO Involvement on The Way?
However, it’s rational to ask if the wider use of Clearance Certificates triggered by the reduction in the price threshold to $750,000 might lead to much closer overview of property related sales and investments by the ATO.
It has already been noted by the ATO that there may be some delays with the issue of Clearance Certificates in cases where applicants have incomplete tax records, for example where tax returns have not lodged for the last two years.
Subsequently the ATO will follow-up individuals where there is evidence of poor tax history, such as the correct and full reporting of rental income.
A Clearance Certificate is valid for 12 months from issue, and must be valid at the time it is made available to the buyer.
Summary of Changes
In the 2017/18 budget the Federal Government announced major changes to the foreign resident capital gains withholding (FRCGW) rate and threshold.
The changes apply to contracts from and on the 1 July 2017: for real property disposals where the contract price is $750,000 and above, the previous price threshold was $2 million the FRCGW withholding tax rate also increased to 12.5% the previous rate was 10%.
The existing threshold and rate will apply for any contracts that are entered before 1 July 2017, even if they are not due to settle until after 1 July 2017.
This measure was introduced as part of the 2017/18 budget where a foreign resident disposes of certain taxable Australian property, the purchaser is required to withhold an amount from the purchase price and pay that amount to the Australian Taxation Office (ATO).
The seller must attach this Certificate to the Sale Contract or serve it upon the purchaser prior to completion. If the Vendor does not do this, the purchaser must withhold 12.5% of the price and pay this to the ATO.
It may take up to 28 days to obtain a Clearance Certificate, so if you are considering selling or auctioning any property for more than $750,000, you should make an application as early as possible. Clearance Certificates are valid for 12 months.