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Buying or selling a property after 1 July 2017? You will need to know your obligations under the capital gain withholding regime for foreign residents
On 1 July 2017, the following important changes to the capital gain withholding regime will take effect:
- The withholding rate will increase from 10 percent to 12.5 percent; and,
- The market value threshold will be reduced from the current $2 million to $750,000.
The capital gain withholding regime commenced on 1 July 2016 and, as we approach the anniversary of its commencement, it is appropriate to provide a brief outline of the regime for our valued clients.
When does the obligation to withhold arise?
The regime applies to the disposal of the following assets by a foreign resident:
- (A). Australian Real property – e.g. vacant land, buildings, residential and commercial properties. It is important to note that mining rights and grant of a lease over real property are included in this category.
- (B). Indirect Australian real property interest – e.g. Sam acquired more than 10 percent membership interest in a company where more than half of the asset of the company complies of Australian real property.
- (C). Options to acquire Australian real property or indirect Australian real property interest.
At the time of this article, the above categories of asset are exempt if they are less than $2 million Australian dollars. However, from 1 July 2017, the threshold will be lowered to $750,000. The practical effect of this should not be underestimated as the new threshold will capture most sale of residential properties in Sydney. If you are intending to dispose of a property for a purchase price that is close to the threshold, you should be aware of your obligation as a vendor.
Foreign resident vendor
The vendor is deemed to be a foreign resident when the purchaser knows or reasonably believes that the vendor is a foreign resident. Apart from actual knowledge, the purchaser might suspect that the vendor is a foreign resident if an address outside of Australia was provided or the vendor directs that funds should be transferred to an overseas account. If, however, the purchase believes on reasonable ground that the vendor is an Australian resident, there is no obligation to withhold from the purchase price. To be safe, the purchaser should always ask the vendor for a clearance certificate or a vendor’s declaration when purchasing properties.
In relation to the sale of assets in category (a) and (b), a vendor who does not provide a valid clearance certificate is automatically deemed to be a foreign resident vendor!.
There are several exceptions to the withholding regime. For example, the regime will not apply to transactions made on an approved stock exchange, transactions where the vendor is in external administration or bankruptcy, and where another withholding obligation applies to the transaction.
If you are an Australian resident and you are thinking of disposing a relevant asset that is $750,000 or more, you should apply for a clearance certificate as soon as possible. This can be done online at the ATO website.
A clearance certificate is valid for 12 months from the date of issue and you should apply with the name that appears on the certificate of title.
If the asset has more than one owner (e.g. an apartment jointly owned by Mr and Mrs Smith), then each vendor must individually apply for a clearance certificate.
For indirect Australian real property interest (other than company title interest) and options to acquire Australian real property or indirect Australian property interest, the vendor may make a declaration of Australian residency instead. A vendor cannot give a declaration in relation to the disposal of real property.
A foreign resident vendor may also apply to the Commissioner of Taxation to have the withholding rate varied or waived. This can also be done online.
If an amount was withheld and paid to the ATO by the purchaser, a foreign resident vendor can claim credit for the withholding amount on their income tax return.
There is no obligation to withhold for a purchaser who has been provided with a valid clearance certificate or a vendor’s declaration from the vendor (not valid for the disposal of Australian real property). Otherwise, the purchaser must withhold 10 percent of the purchase price (or a percentage as varied) and pay it to the ATO at the time it becomes the owner of the asset.
After entering into a contract for sale, the purchaser will need to complete a Foreign resident capital gains withholding purchaser payment notification form (NAT 74884). The purchaser will need to pay to the ATO the amount withheld before the transfer of ownership of the asset has occurred.
There are penalties for a vendor who makes a false declaration and for a purchaser who does not withhold when required to do so. For the latter, the penalty imposed could be as much as the amount that was required to be withheld and paid.
The capital gain withholding regime is here to stay and vendors and purchasers need to be aware of their respective obligations in a sale of property transaction. If you require further assistance or clarification, our property team at Priority Business Lawyers are more than happy to assist you.
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