Extra steps for property sales over $2 million
Feb 08, 2017As you may be aware, owners of certain types of property are required to pay capital gains tax when the property is sold. This is normally accounted for when the vendor does their next tax return. However, in the case of foreign residents, compliance has been poor and it has proven difficult for the Australian Taxation Office (“ATO”) to chase payment once the money and/or the vendor has returned overseas.
The definition of “foreign”
Foreign residents are defined as individuals who don’t reside in Australia or who are present in Australia for less than 183 days of the income year. If a company is not incorporated in Australia, does not carry on business in Australia, and has its central management or control outside of Australia, then it is considered a foreign company.
The new law
In an attempt to crack down on non-compliance the Government amended the tax laws last year by introducing a Foreign Resident Capital Gains Withholding Tax regime. The new regime applies to:
- all contracts entered into after 1 July 2016
- with a sale price of $2 million or more.
How it works in practice
Rather than relying on the vendor to lodge a tax return or make the required payment for Capital Gains Tax to the Taxation Office after settlement, the ATO now works on the assumption that all sales that fall into the above category are made by foreign residents. An amount equivalent to 10% of the sale price must be held back by the purchaser on settlement and paid to the ATO in payment of Capital Gains Tax.
To avoid having to withhold this money, any vendor of property selling for $2 million or more, who is not a foreign resident, must complete an Application for a Clearance Certificate and lodge it with the ATO prior to settlement. The ATO will then process the application and issue a clearance certificate confirming that the purchaser is not required to withhold any monies at settlement for Capital Gains Tax. This Certificate must be provided to the purchaser before settlement otherwise the purchaser will be required to withhold the 10% to pay to the ATO.
Examples
To understand how the new laws operate, it is useful to consider the following examples (taken from the Tax and Superannuation laws Amendment (2015 Measures no. 6) Bill 2015 Explanatory Memorandum):
Example 1
Louis purchases real estate in Melbourne from Lucas for $3 million. Although Louis believes that Lucas is an Australian resident, unless Lucas provides Louis with a clearance certificate from the Commissioner/ATO, Lucas will be considered a relevant foreign resident. Therefore, if Lucas does not apply for and provide a certificate to Louis before settlement, Louis would need to make a withholding payment to the ATO under the new law.
Example 2
Jane plans to sell a piece of real estate in Sydney to John for $4 million. Because Jane knows that she is a foreign resident at the time the transaction is entered into, she does not apply for a certificate from the ATO. In the absence of a certificate, Jane will be considered a relevant foreign resident for the purposes of the amendments. Therefore, John is required to make a withholding payment to the ATO under the new law.
How to apply
The application can be lodged with the ATO either online through their website or by completing the application form and faxing it to their office. The turnaround time for processing the application is approximately 2-7 days however it may take longer if the vendor has not completed a tax return in the last two years so it is important that the application is lodged promptly to avoid any delays to settlement.
Contact the Shire Legal team if you have any questions.
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