From July 1 2016, all Australian residents, selling property with a market value over $2 million (GST exclusive) will need to get a clearance certificate from The Australian Taxation Office (ATO).
From 1 July 2016, a 10% withholding tax will apply when foreign residents sell certain types of Australian property. If you are selling Australian property, the new rules assume you are a non-resident unless you have a clearance certificate from the ATO. Without this clearance certificate, the purchaser must withhold 10% of the purchase price and pay this to the ATO.
While the intention of the legislation is to ensure that any foreign resident vendors comply with their obligation to pay Australian tax on the realisation of Australian assets, the practical effect is that all Australian resident vendors will need to comply with the prescribed regime prior to settlement in order to receive the full proceeds at the time of settlement.
What type of ‘property’ is affected by the new rules?
The new withholding rules apply to:
- Taxable Australian real property – such as residential property, commercial property, land etc., situated in Australia as well as certain mining, quarrying or prospecting rights;
- Indirect Australian real property interests (i.e., shares in a company or units in a trust where certain conditions are met). This is generally where most of the value of the company or trust relates to real property holdings in Australia;
- and Options or rights relating to the above.
What are the rules if there is more than one purchaser?
The market values of all of the interests to be acquired need to be aggregated to determine whether the $2 million threshold applies. For example, if two investors are buying a property as joint tenants with a total market value of $2 million, the rules could be triggered even though their individual interest in the property is only worth $1 million each.
How to obtain a clearance certificate
The vendor may apply for a clearance certificate at any time they are considering selling property. This can be before the property is listed for sale. The clearance certificate will be valid for 12 months and must be valid at the time the certificate is given to the purchaser prior to settlement.
The ATO is implementing an 'automated' process for issuing a clearance certificate. This would involve:
- the vendor (or their agent) completing an online 'Clearance certificate application for Australian residents' form;
- the information on the application being automatically checked against information held by the ATO to assess if the vendor should be treated as an Australian tax resident for the purposes of the transaction; and
- the automatic issuance of a clearance certificate which removes the need for the purchaser to withhold the 10% from the sale proceeds.
In straightforward cases where the ATO has all the required information, it is expected that clearance certificates will be provided within days of being submitted.
However, where there are data irregularities or exceptions, some manual processing may be required and the clearance certificates will be provided within 14 – 28 days. Higher risk and unusual cases may also require greater manual intervention which could take longer.
Where a vendor is not entitled to a clearance certificate, either the vendor or the purchaser can apply to the ATO for a variation to the amount required to be withheld, for example if the vendor will not have a capital gains tax liability as a result of the sale because the land is being sold at a loss.
Who does a purchaser pay?
Where an amount is required to be withheld, a purchaser will be required to pay the amount to the ATO at or before settlement.
To do so, the purchaser must complete an online “Purchaser Payment Notification” form which requires disclosure of the details of the vendor, purchaser and the asset which is the subject of the transaction. The purchaser can then pay the relevant amount to the ATO by electronic funds transfer or cheque (at a post office or sent directly to the ATO).
There are penalties for purchasers failing to pay the amount on time.
What you need to do
If you are selling property with a market value of $2 million or above:
- Australian residents - need to obtain a clearance certificate from the ATO, and provide it to the purchaser prior to settlement. Online forms are available at ato.gov.au/FRCGW.
- Foreign residents - may apply to the ATO for a variation to the 10% non-final withholding tax, and provide this notice to the purchaser prior to settlement. The amount remitted to the ATO will be allowed as a credit against tax assessed in that year’s tax return.
If you are purchasing property with a market value of $2 million or above:
- You need to withhold 10% of the purchase price and pay it to the ATO unless the seller provides you with a clearance certificate.
- You may vary down the 10% non-final withholding tax if the seller provides you with a variation notice from the ATO prior to settlement.