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Foreign Resident Capital Gains Withholding Payments

By Elke Blake

From 1 July 2016 Australian residents selling real estate with a market value of $2 million or more will need to apply for a clearance certificate from the Australian Taxation Office (ATO) to ensure amounts are not withheld from the sale proceeds. Where a valid clearance certificate is not provided by settlement, the purchaser is required to withhold 10% of the purchase price and pay this to the ATO.

What this means for purchasers

Where a foreign resident disposes of Australian real property with a market value of $2 million or above, the purchaser will be required to withhold 10% of the purchase price and pay it to the Australian Taxation Office (ATO) unless the seller provides you with a variation. Australian residents will need to provide a clearance certificate otherwise a withhold of 10% of the purchase price will apply.

What this means for sellers

Australian resident vendors who dispose of Australian real property with a market value of $2 million or above will need to apply for a clearance certificate from the ATO to ensure amounts are not withheld from their sale proceeds.

All transactions involving real property with a market value of $2 million or above will need the vendor and purchaser to consider if a clearance certificate is required. If a purchase price negotiated between a purchaser and vendor is on an ‘arm’s length basis’, then the purchase price may be used as a proxy for market value.

When will this apply?

The new withholding regime will apply to contracts entered into on or after 1 July 2016 for the sale of property with a market value of $2 million or above.

What if there are multiple purchasers?

The market value of all purchasers’ interests in the transaction must be aggregated in examining whether the $2 million market value threshold has been reached. If the aggregated purchase price is $2 million or above, each purchaser must withhold in proportion to their percentage of the total purchase price.

What if there are multiple vendors?

If there are multiple vendors disposing of the property, it is the total market value of the property that determines whether withholding is required by the purchaser. That is, if the market value is $2 million or above then the purchaser must withhold 10% of this (remembering that the purchase price may be able to be used as a proxy for market value).

If the purchaser has not been provided with a clearance certificate or a notice of variation from any of the vendors, the purchaser must withhold 10% of the purchase price.

The amount of withholding will be in proportion to each vendor’s interest in the property, with the total withholding equal to 10% of the property’s market value. If any of the vendors provide a clearance certificate or a notice of variation then the amount withheld by the purchaser on that vendor’s proportional interest in the property must reflect this. The purchaser must consider each vendor’s circumstances separately in determining the amount to withhold from each vendor.

Clearance certificates

All real property transactions with a market value of $2 million or above will need the vendor and purchaser to consider if a clearance certificate is required. Where a clearance certificate is provided, the purchaser is not required to withhold an amount from the purchase price. Vendors need to provide a clearance certificate to the purchaser on or before the settlement of the transaction. A clearance certificate must be valid at the time it is provided to the purchaser. Clearance certificates are valid for 12 months, and can be used by the same vendor for the sale of multiple properties while valid.

How can an Australian resident vendor obtain a clearance certificate?

To obtain a clearance certificate, a vendor who is an Australian resident (or their representative) must complete an online ‘Clearance certificate application for Australian residents’ form. This form will be available on ato.gov.au/FRCGW from 27 June 2016. A PDF version of the clearance certificate application will be available for contracts that are to be signed and settled within the first two weeks of July 2016. Otherwise, vendors should be encouraged to wait and use the online form from 27 June 2016. If the vendor is automatically assessed as an Australian resident, a clearance certificate will be issued electronically within days of the application being submitted. If there are data irregularities or exceptions, some manual processing may be required and the clearance certificate will be provided within 14–28 days. Higher risk and unusual cases may require greater manual intervention and could take longer to process.

For more information, visit www.ato.gov.au

Reference – Australian Taxation Office

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