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The foreign resident capital gains withholding

The foreign resident capital gains withholding

Compulsory ATO certificate required from 1 July 2017 to prove sellers are not foreign investors.

On 9 May 2017, the Government announced changes to the foreign resident capital gains withholding (FRCGW) rate and threshold. The changes will apply to contracts entered into on or after 1 July 2017:

  • for real property disposals where the contract price is $750,000 and above (currently $2,000,000);
  • the foreign resident capital gains withholding tax rate will be 12.5% (currently 10%).

The existing threshold and rate will apply for any contracts that are entered into or before 1 July 2017, even if they are not due to settle until after 1 July 2017.

Background

Broadly, where a foreign resident disposes of certain taxable Australian property, the purchaser is required to withhold an amount from the purchase price (see note below) and pay that amount to the Australian Taxation Office (ATO).

Note: the legislation specifies that the withholding is actually on the “first element of the cost base”. However, as purchase price is understood by vendors and purchasers, and in many instances will equate with the “first element of the cost base”, we have used the term purchase price for simplicity.

Legislation and supporting material

The Treasury Laws Amendment (Foreign Resident Capital Gains Withholding Payments) Act 2017 received Royal Assent on 22 June 2017.

For transactions entered into from 1 July 2017, the threshold and rate as stated in this Act will apply.

For transactions prior to 1 July 2017 the threshold and rate as stated in Tax and Superannuation Laws Amendment (2015 Measures No. 6) Act 2016 will apply.

Information on the application of the foreign resident capital gains withholding tax is available on the ATO website and via the following links Capital gains withholding: Impacts on foreign and Australian residents.

Home owners will be required to obtain a clearance certificate before they sell on property sales of $750,000 or more to prove they are not a foreign investor.

Changes announced in this year’s Federal Budget to the foreign resident capital gains tax lowered the property threshold but increased the withholding rate to 12.5% on $750,000 plus properties.

It’s important to note that these changes present increased risks and potentially impact on sellers, buyers and advisors.

Under the changed law, vendors of real estate with a value of $750,000 or more are now required to obtain a residency clearance certificate from the Australian Taxation Office (ATO) to avoid a compulsory 12.5% withholding tax from the sale price.

Failure to withhold results in a 12.5% liability on the purchaser at settlement if a valid clearance certificate is not held by them at that time. On a minimum sale price of $750,000 that amounts to $93,750 payable to the ATO.

Under the changes, all Australian sellers are deemed foreign investors by the ATO until proven otherwise.

The foreign resident capital gains withholding tax nationally was originally introduced on 1 July last year and was initially imposed on real estate valued at $2,000,000 or more.

The primary purpose of the tax is to ensure foreign residents pay capital gains tax on Australian property transactions.

Sellers are encouraged to apply for a clearance certificate as soon as they think of selling as the lodgement process can take anywhere from 3 days to 6 weeks.

As a buyer, the onus is on you to make sure a residency clearance certificate has been provided by the vendor on settlement.