Foreign Resident Capital Gains Tax Withholding Regime
On 22 June 2017, the Treasury Laws Amendment (Foreign Resident Capital Gains Withholding Payments) Act 2017 (‘the Act’) received Royal Assent. The Act amends the existing foreign resident capital gains tax withholding regime and will apply to contracts entered into after 1 July 2017. The changes include the following:
- An increase in the withholding tax rate from 10 per cent to 12.5 per cent of the purchase price; and
- A reduction in the withholding threshold of the purchase price from $2,000,000.00 to $750,000.00.
The regime is intended to ensure that capital gains of foreign residents do not escape tax in Australia by imposing an obligation on the purchaser (whether they are an Australian resident or not) in relation to a relevant transaction. For our purposes, this obligation applies to a transaction involving the acquisition of an asset that is Australian real taxable property (i.e. vacant land, buildings, residential and commercial property), an indirect real property interest or an option to acquire such property interest unless the following applies:
- The transaction is specifically excluded from the regime (e.g. the transaction involving real property is valued under $750,000.00); or
- In the case of an Australian real property transaction, the vendor provides a clearance certificate issued by the Australian Taxation Office (“the ATO”) that confirms that the vendor is not a foreign resident
If the Exceptions do not apply, the purchaser is required to pay 12.5 per cent of the total consideration to the Commissioner of State Revenue (“the Commissioner”) on or before Settlement of the transaction. Some practical considerations to be mindful of our outlined below.
ACTING FOR PURCHASERS
For purchasers of Australian real property in which an Exception does not apply, the purchaser is obliged to withhold 12.5 per cent of the purchase price and pay it to the Commissioner. The purchaser is required to complete a Foreign residential capital gains withholding Purchasers Payment Notification Form (‘the Purchasers Form”) and should be done on or before settlement. The Purchasers Form can be accessed online here. If the purchaser fails to obtain a PRN and pay the withholding when they become the owner of the asset, general interest charges will be imposed.
Where engaged by the purchaser you need to advise that the obligation to both withhold and pay that withholding to the ATO is with the purchaser, even if the purchaser uses representatives to assist them in the process. Administrative penalties apply for failure to adhere to the Act. The offence provision for failing to withhold also applies. A general interest charge is imposed for amounts not paid by the required date.
ACTING FOR VENDORS
For a vendor selling Australian real property in which an Exception does not apply, it is critical that a clearance certificate is obtained regardless of the identity of the vendor. A clearance certificate can be applied for online here and is currently expected to take between 14 to 28 days to issue. A clearance certificate is valid for 12 months from the date of issue. The certificate is required to be completed and provided on or before settlement. Where engaged by the vendor you need to: -
Know what the purchase price will be to determine whether the Act applies;
- If the purchase price is $750,000.00 or above, advise the vendor that they will need to obtain a clearance certificate from the ATO to avoid 12.5 per cent of the purchase price being withheld at Settlement; or
- If you are unsure of the purchase price because the property is going to auction, advise the vendor that they will need to obtain a clearance certificate from the ATO if the price achieved exceeds $750,000.00 to avoid 12.5 per cent of the purchase price being withheld at Settlement; or
- If the purchase price is $750,000.00 or above and the vendor is a foreign resident, advise the vendor that 12.5 per cent of the purchase price will be withheld at settlement by the purchase and provided to the ATO.
(NOTE: the same rules apply irrespective of the length of the settlement period. However, if there is a short settlement period you should advise the vendor they will need to obtain a clearance certificate as soon as possible if they wish to avoid 12.5 per cent of the purchase price being withheld at settlement)
If you have any questions about the above or how it will impact your sale or purchase, please contact our Coronis Conveyancing team on (07) 3828 2027 or visit coronisconveyancing.com.au