Are you buying or selling Australian property valued at $750,000 or higher? A new tax withholding regime applies!
And by “property” we mean:
- residential or commercial real estate
- vacant land farm land
- mining/quarrying/prospecting rights
- leases over real property
- a membership interest of 10% or more in an entity whose underlying value is principally derived from the above.
From 1 July 2016 Foreign Resident Capital Gains Withholding has applied to sales of Australian property by those who are not Australian residents for tax purposes, and from 1 July 2017 the threshold and withholding rate have been adjusted:
* The ATO accepts selling price as proxy for market value provided the transaction is occurring at arm’s length.
What does it mean?
If you are selling a property for $750,000 or more, you will need to prove that you are an Australian tax resident, or else the buyer will pay you only 87.5% of the sale price, and the remaining 12.5% will be paid to the ATO. You will then need to wait until you can lodge your tax return to claim the 12.5% amount as a tax credit and get it refunded. Even if it is your primary residence!
If you are buying a property for $750,000 or more, you will need to request a clearance certificate from the seller, or withhold 12.5% of the property price, report the transaction and pay the withholding to the ATO. If you do not comply, you may be held liable for the withholding amount and end up paying an extra 12.5% of the purchase price plus penalties.
Note: If the property falls into this regime, there are reporting obligations for the buyer AND the seller (on top of withholding obligations) unless the vendor can provide the clearance certificate to the buyer.
The withholding acts as a ‘prepayment’ of capital gains tax in relation to Australian property sales by foreign residents, to stop them selling and leaving the country without paying the appropriate Australian income tax. When the foreign resident lodges their Australian tax return, they will show the withholding as a tax credit and can get any excess tax refunded.
How do you prove Australian residency for tax purposes?
By obtaining a clearance certificate from the ATO prior to settlement. The certificate can be requested online and we can assist with this process. If the property is owned jointly, each person or entity that is listed on the title will need to apply for the certificate.
How long does it take to get the clearance certificate?
Around half of applications are processed automatically, and the certificate is issued within days or, in some instances, on the spot. The other half requires manual processing and takes 14 to 28 days to issue. According to the ATO, “higher risk and unusual cases may also require greater manual intervention, which could take longer.”
It is therefore important to apply well in advance of settlement and that the information submitted is checked for accuracy beforehand. The ATO recommends applying at least 14 days in advance and are even suggesting applying as soon as you list the property for sale! The certificate is valid for 12 months so you can apply well in advance of the sale.
Options for foreign residents
If you are not an Australian tax resident, you will be subject to the full 12.5% withholding rate on sales of your Australian property unless you apply to the ATO for a variation, requesting a reduced rate of withholding between 0% and 12.49%.
Reasons for a variation include:
- The property is being sold at a loss, or a Capital Gains Tax rollover applies;
- You will not have a tax liability because of carried forward capital and/or tax losses;
- There is a mortgage over the property and the proceeds from sale are insufficient to both repay the mortgage and cover the withholding tax.
In the majority of cases, the variation notice will be issued within 28 days.
Application for a variation is done online and we can help you with completing and lodging it. If the property is jointly owned, each co-owner will need to apply separately.
REMEMBER: IT’S “NON-RESIDENT UNTIL PROVEN RESIDENT”, so withholding applies by default if the property is being sold for $750,000 or more. Repercussions for non-compliance are likely to be financially significant, especially for buyers!
Summary of what you need to do if you are buying or selling an Australian property for $750,000 or more:
We can guide you through this process and assist with obtaining the clearance certificate(s), variations or transaction reporting. Please contact your Ruddicks adviser if you have any questions in relation to this new regime.
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The content of this newsletter is general in nature. It does not constitute specific advice and readers are encouraged to consult their Ruddicks adviser on any matters of interest. Ruddicks accepts no liability for errors or omissions, or for any loss or damage suffered as a result of any person acting without such advice. This information is current as at 1 June 2018. Ruddicks particularly accepts no obligation or responsibility for updating this publication for events, including changes to the law, the Australian Taxation Office’s interpretation of the law, or Government announcements arising after that time.
Any advice provided is not ‘financial product advice’ as defined by the Corporations Act. Ruddicks is not licensed to provide financial product advice and taxation is only one of the matters that you need to consider when making a decision on a financial product. You should consider seeking advice from an Australian Financial Services licensee before making any decisions in relation to a financial product. © Ruddicks 2018