As part of the Government’s stand against tax avoidance, in Treasury Laws Amendment (Foreign Resident Capital Gains Withholding Payments) Act 2017 new rules regarding changes to the foreign resident capital gains withholding (FRCGW) threshold and withholding rate will apply to contracts entered into on or after 1 July 2017.
Previously, purchasers of Australian real property worth more than $2 million must have withheld 10% of the purchase price unless the vendor produced a clearance certificate or variation certificate. On 9 May 2017, the Government announced proposed changes in reducing the threshold to $750,000 and increasing the rate of withholding to 12.5% from 1 July 2017 onwards. The existing threshold and rate will apply for any contracts that are entered into before 1 July 2017, even if they are not due to settle until after 1 July 2017.
Australian resident vendors
Where a clearance certificate is produced by the vendor, no tax is required to be withheld. Clearance certificates may be obtained from the Australian Taxation Office (ATO) as soon as vendors consider selling their property, as the certificate lasts for 12 months and is not property-specific. Where the purchaser fails to withhold the correct amount of 12.5% from 1 July 2017 onwards, the ATO may impose penalties equal to the amount that should have been withheld. Accordingly, all parties should ensure that the correct certificate is applied for prior to a sale. Purchasers must pay the amount withheld at settlement to the Commissioner of Taxation.
The foreign resident vendor must lodge a tax return at the end of the financial year, declaring their Australian assessable income, including any capital gain from the disposal of the asset. As a tax file number (TFN) is required to lodge a tax return, they must apply for a TFN if they currently do not have one. The vendor may claim a credit for any withholding amount paid to ATO in their tax return.
A variation certificate may be obtained in certain circumstances such as if 10% of the sales proceeds are less than the amount of capital gains tax payable, or if a capital gains tax exemption applies. This will vary the amount of withholding from 12.5% (from 1 July 2017 onwards) of the sale price, to one that more accurately reflects the actual amount of capital gains tax payable. Should the property be sold at a loss, the withholding rate would subsequently be reduced to nil. The variation certificate is also valid for 12 months but is specific to a certain property.
If you require further advice on how these changes will affect you or if you require any assistance, please do not hesitate to contact us.