‘Foreign resident capital gains withholding’ doesn’t sound like a concept that most people need to be concerned with. However, since July 2017, it has become highly relevant for thousands of people across Australia who are buying and selling property.
‘Foreign resident capital gains withholding’ is a 12.5% withholding tax obligation with a misleading title. Labelling it as ‘foreign resident’ naturally gives Australians the impression that it is doesn’t apply to them. However, one of the peculiarities of this legislation is that it starts with the assumption that all vendors selling real property are non-resident for tax purposes even if they are Australian tax residents or citizens who have never even been overseas.
Broadly speaking, the tax obligation applies to real property sales in Australia more than $750,000. The previous threshold was $2 million, meaning many people didn’t have to concern themselves with it. But now median house prices in Melbourne and Sydney are well above the new threshold (and between $500-$650k in other capital cities), the situation is quite different.
What is required of vendors and purchasers?
The vendor selling the property needs to get a tax clearance certificate from the ATO (Australian Tax Office) to confirm there is no CGT applicable to the property and thus no need to withhold tax. Alternatively, they can get a variation to reduce the rate below 12.5%.
If a tax clearance certificate is not obtained by the vendor selling the property, then the purchaser is obliged to withhold tax from the purchase price and pay this amount to the ATO instead of paying it to the vendor.
Why is this a risk for the purchaser?
Counterintuitively, the initial tax obligation is with the purchaser, not with the seller. The purchaser is expected to have completed an online form notifying the ATO of the need to withhold prior to settlement so they can be provided with a payment reference number and barcode to enable them to make payment.
Bear in mind the requirements revolve around the need to have the right certificate, not the actual need to withhold based on the vendor’s known or suspected residency status. Still, even though the vendor needs to account for any taxation on sale of the property, it is the purchaser who carries the liability to withhold the tax and pay it to the ATO at settlement, and is liable for interest if payment is not made.
What if the seller does not have a clearance certificate?
If someone sells their property, has no CGT exposure and the property sells for over $750,000 without a clearance certificate on hand:
- A complying purchaser must pay 12.5% of the price to the Government and not to the seller, so the seller is out of pocket until they lodge their tax return to reclaim the credit, or
- If the purchaser is not aware or not prepared and is required to withhold, the Government will charge the purchaser general interest charge (GIC) on the withholding amount from the date of settlement until it is paid and the ATO will hold the purchaser liable for the amount. The current rate of GIC for the September 2017 quarter is 8.73%.
There are of course many other tax concepts relating to these new rules in play and multiple complexities depending on the situation at hand which advisors across the various professions dealing in CGT and property need to be aware of.