No.35: Foreign resident capital gains withholding payments

The government has enacted legislation to introduce a 10% non-final withholding tax on payments made to foreign residents that dispose of certain taxable Australian property. However, Australian resident vendors are also directly affected by these new rules – see below. The new withholding regime will apply to contracts entered into on or after 1 July 2016.

Assets Affected
This withholding is limited to taxable Australian property, being:

  • Real property in Australia – land, buildings, residential and commercial property with a market value equal to or over $2 million;
  • Lease premiums paid for the grant of a lease over real property in Australia;
  • Mining, quarrying or prospecting rights;
  • Interests in Australian entities whose majority assets consist of the above such property or interests – this is called an indirect interest;
  • Options or rights to acquire the above property or interest.

Clearance Certificate
The legislation introduces a clearance certificate model to provide certainty to purchasers regarding their withholding obligations. For real property transactions with a market value of $2 million or above, the purchaser must withhold 10% of the purchase price unless the vendor shows the purchaser a clearance certificate from the ATO. This certificate can be provided to the purchaser on or before the settlement of the transaction.

Implications for Australian Resident Vendors
Although this legislation aims at protecting the integrity of the foreign resident capital gains tax (CGT) regime, it nonetheless impacts Australian residents due to the introduction of the clearance certificate model. Australian resident vendors of real property (including the family home) with a market value of $2 million or above will need to apply for a clearance certificate and provide this to the purchaser before settlement. If the Australian resident vendor fails to provide the certificate by settlement, the purchaser will be required to withhold 10% of the purchase price and pay this to the ATO.

Action Required
The vendor may apply for a clearance certificate at any time they are considering the disposal of real property. This can be before the property is listed for sale. The clearance certificate will be valid for 12 months and it must be valid at the time the transaction is entered into to avoid this withholding obligation. The ATO is implementing an ‘automated’ process for issuing a clearance certificate. At the time of issue of this Client Alert, this system has not been released yet. Currently, the system is a manual system and the ATO is warning certificates will take at least 14 days to issue, but if there are higher risk and unusual cases that require greater manual intervention, it could take longer.

If you are considering selling real property on or after 1 July 2016 and its market value is likely to be equal to or higher than $2 million, it is very important to obtain a clearance certificate from the ATO before the settlement to avoid the 10% withholding tax.

If you have any queries in respect to this matter, please do not hesitate to contact your Blaze Acumen adviser.