Capital gains withholding: Implications for Australian and foreign residents

There has been significant changes in tax legislation with regards to buying and selling property, and how Capital Gains Withholding Tax will be treated at the time of settlement.  These changes will affect both Australian and Foreign Residents.

The aim of this legislation is to capture unpaid taxes from Foreign Residents, which in the past have been difficult to recover.

If not treated correctly, there can be costly implications for the Vendor and Purchasers of Australian property owned by Foreign Residents.

CAPITAL GAINS BACKGROUND

Previously under Australian tax laws, Foreign Residents were taxed on capital gains they make from the sale of a ‘taxable Australian property’.

On the 1st of July 2016 a 10% non-final withholding was applied to these dealings at settlement for properties worth $2 Million and above.

However due to the gaps in the administrative and jurisdictional tax systems internationally, voluntary compliance was at a low. This in turn made collection of outstanding tax liabilities from Foreign Residents extremely challenging.

NEW LEGISLATION ON CAPITAL GAINS WITHHOLDING

As of the 1st of July 2017, new rules apply for Foreign Resident capital gains withholding (FRCGW). This is applicable to any vendors that enter into contracts from this date.

The FRCGW tax is now 12.5% and will affect real property disposals where the contract price is $750,000 and above.

Please note the original $2M threshold and 10% withholding rate will apply to contracts entered into from the 1st of July 2016 to the 30th of June 2017, regardless of settlement date.

IMPLICATIONS

If the Vendor does not provide a Clearance Certificate, then the Purchaser must withhold and remit 12.5% of the purchase price to the ATO.

This means that the Vendor receives 12.5% less of the agreed purchase price on the Contract of Sale.  If the Vendor is an Australian Citizen, this 12.5% may not have been applicable.

If the Purchaser does not withhold the 12.5% withholding, and there is no Clearance Certificate, the ATO may impose a penalty against the Purchaser for the value of the 12.5% withholding.

For example if you the Purchaser buy a property for $1M without a Clearance Certificate at settlement, and the ATO deems that the 12.5% withholding was applicable, the ATO may impose on you a penalty of $125,000 for failing to collect the withholding monies on the ATO’s behalf.

SOLUTION

Australian Resident Vendors

It is quite simple for Australian Resident Vendors to avoid the 12.5% withholding. On Settlement, one of the following must be presented to the Purchaser:

• For Australian real property, a Clearance Certificate must be obtained from the ATO.
  At settlement time, this Certificate will provide certainty that no withholding tax is applicable

• For other asset types, a vendor declaration that they are not a foreign resident.If an Asset is owned by multiple vendors (for example joint owners), each individual vendor must apply and provide the purchaser with their individual certificate, thus avoiding the withholding tax on their share of the sale.

Foreign Residents

Foreign resident vendors may apply for a variation of the withholding rate or make a declaration that a membership interest is not an indirect Australian real property interest and therefore not subject to withholding.

Purchasers must pay the amount withheld at settlement to the Commissioner of Taxation.

More information on this legislation can be found on the ATO website at CGT Withholding Common Questions.