In 2016, the government introduced the foreign resident capital gains withholding (“FRCGW”) regime with an intention to assist in the collection of Australian tax liabilities by foreign residents. The FRCGW applied to vendors disposing of certain taxable Australian property.
As of the 1 July 2017, the government has introduced changes to the FRCGW tax rate and threshold. The FRCGW will now apply to property disposals where the contract price is $750,000 or above and the withholding tax rate is increased to 12.5%.
The changes will apply to all contracts entered into on or after 1 July 2017, regardless of whether they are pursuant to a pre-existing option.
Assets affected:
The FRCGW regime applies to the following asset types:
- Real property
- Taxable Australian real property with a market value of $750,000 or more;
- Vacant land, buildings, residential and commercial property;
- Mining, quarrying or prospecting rights where the material is situated in Australia; and
- Lease over real property in Australia.
- Other assets
- Interests in Australian entities whose majority assets consist of the above such property or interests – this is called an indirect interest; or
- Options or rights to acquire any of the above asset types.
Exclusions:
Some assets are not subject to the withholding including:
- Real property transactions with a market value under $750,000;
- Transactions listed on an approved stock exchange; or
- Foreign resident vendor under external administration or in bankruptcy.
Implications of the FRCGW regime:
Every person who sells real property in Australia worth $750,000 or more, must obtain a clearance certificate from Australian Tax Office. The clearance certificate will ensure that Australian resident sellers are not required to incur 12.5% withholding.
How long is the clearance certificate valid for?
The clearance certificate is valid for 12 months. You can use the same certificate for multiple sales by the same entity within the 12 months period.
What is the process of obtaining clearance certificate?
AVA Legal can provide assistance with obtaining the clearance certificates on your behalf. All parties on the Certificate of Title will require a clearance certificate. It is recommended to allow up to 30 days for the application to be processed. We are able to assist with more urgent applications so that settlement can occur without any withholding. In the past, for example, we have at times obtained the clearance certificate in less than 7 days for our clients.
What if a clearance certificate is not obtained for a direct sale of real property?
If the property’s market value is over $750,000, the buyer must withhold 12.5% of the purchase price at settlement. This amount must be remitted to the Australian Tax Office.
Will there be an impact on the contract for sale?
Depending on the circumstances, the contract of sale might include special conditions that deal with obtaining and providing clearance certificates. Regardless of this, the buyer will remain liable to withhold 12.5% of the purchase price at settlement if a clearance certificate is not provided.
Disclaimer: This post has been prepared as a general summary only. It is not, and is not intended to be, legal advice with respect to any particular matter. This post should not be relied on with respect to any particular matter without taking legal advice. The author disclaims liability to any person who relies on this post.