New changes to foreign resident capital gains withholding tax
New changes apply to the foreign resident capital gains withholding tax for the disposal of certain taxable Australian property under contracts entered into from 1 July 2017.
On 9 May 2017, the Federal Government announced changes to the foreign resident capital gains withholding (FRCGW) threshold and withholding rate as part of the 2017-2018 Budget.
The FRCGW legislation assists the Australian Tax Office (ATO) with the collection of foreign residents’ Australian tax liabilities. The legislation imposes an obligation on purchasers to withhold an amount from the purchase price and pay that amount to the ATO.
What has changed?
The new changes come into force under the Treasury Laws Amendment (Foreign Resident Capital Gains Withholding Payments) Act 2017 (the Act), which became an Act of Parliament after royal asset was granted on 22 June 2017.
Under the Act, the following changes will apply to contracts entered into on or after 1 July 2017:
- obligations will be placed on buyers and sellers of real property throughout Australia where the value of the property being sold exceeds $750,000 (reduced from $2 million);
- Australian resident vendors will be required to obtain a clearance certificate from the ATO prior to settlement to ensure they don’t incur the non-final withholding amount;
- purchasers will be required to withhold 12.5% (up from 10%) of the market value from settlement proceeds in the event a vendor fails to provide a clearance certificate from the ATO; and
- foreign and temporary tax residents will no longer be able to claim the main residence capital gains tax (CGT) exemption.
A seller or vendor will be considered a foreign resident if:
- the purchaser knows or has reasonable grounds to believe the vendor is a foreign resident;
- the purchaser is authorised to make a financial benefit to a place outside Australia (whether to the vendor or to anybody else);
- the vendor doesn’t provide the purchaser with a valid clearance certificate by settlement; or
- the vendor doesn’t provide the purchaser with a valid vendor declaration stating they are an Australian resident when asked to do so by the purchaser.
A clearance certificate provides certainty to purchasers regarding their withholding obligations and can be applied for online from the ATO. A valid clearance certificate confirms that the purchaser is not required to withhold an amount from the purchase price for the vendor listed in the clearance certificate. If the vendor fails to provide the clearance certificate by settlement, the purchaser is required to withhold 12.5% of the purchase price.
The changes brought in by the Act apply to all real property contracts within Australia dated on or after 1 July 2017. The previous FRCGW threshold ($2 million) and rate (10%) 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.
Real property includes vacant land, buildings, residential and commercial property; mining, quarrying or prospecting rights where the material is situated in Australia; and a lease over real property in Australia.
Under the Act, the obligations will also apply to transfers of property between family members and related parties, including by gift. However, deceased estate transfers of real property appear to be exempt and parties to these transactions will not be required to obtain a clearance certificate.
Further exemptions to the FRCGW regime include:
- Real property transactions with a market value under $750,000;
- Transactions listed on an approved stock exchange; and
- Where the foreign resident vendor is under external administration or in bankruptcy.
It is also important to note that transactions involving multiple contracts for different properties between the same parties, where the value of each individual contract is lower than $750,000, are not aggregated as they are under section 30 of the Duties Act 2001 (QLD). This is certainly a sigh of relief for those purchasing under put and call option agreements like builders or developers.
In light of the changes, the practical advice for Australian property vendors is that they should apply to the ATO for a clearance certificate as soon as they contemplate selling a relevant property valued at over $750,000.
To obtain specific advice pertaining to your relevant situation, contact DSS Law’s property law team.
Further information can also be obtained from the ATO website.
DSS Law insight articles are intended to provide commentary and general information. They should not be relied upon as formal legal advice. If you would like specific advice relating to this topic, please contact DSS Law on email@example.com.