From 1 July 2017, new rules for Foreign Resident Capital Gains Withholding (“FRCGW”) will apply to vendors selling of an Australian property (including both real property and other properties). This article will only discuss how the regime applies to the real property transactions.
There are two changes main changes from the 2016-17 policy:
- the threshold is reduced from $2,000,000.00 to $750,000; and
- the FRCGW withholding tax rate will be increased from 10% to 12.5%.
The change is a part of the Federal budget plan to impose “stronger rules for foreign investors owning Australian housing”.
When is the purchaser required to withhold?
Technically, the purchaser is required to withhold, where the value of the property purchased is above $750,000.00 and the purchaser knew or have reasonable grounds to believe that the Vendor is a foreign person, unless the vendor produces a Clearance Certificate.
However, practically, in an arm length transaction where the parties do not know each other, purchaser should always ask the vendor if they are to provide a Clearance Certificate before settlement. If the vendor is not to provide the Clearance Certificate, the purchaser should simply withhold 12.5% on settlement.
What does the purchaser need to do?
Where a Clearance Certificate is not received from the vendor, the purchaser must lodge a payment notification to the ATO at least five days before the settlement. The payment notification should accurately indicate the withholding rate when there is a variation notice.
If there are multiple purchasers, each purchaser must notify to the ATO with their percentage of property ownership, separately. If a purchaser fails to provide the percentage of property ownership, the ATO will assume that the purchasers have an equal share of property ownership.
Once the Notification Form is processed, a payment reference number (PRN) will be issued and payment could be made via EFT or Cheque with the PRN number.
The payment must be made “on or before” the day the purchaser becomes owner, that is, on or before the settlement date. The payment can be made by EFT or cheque to ATO.
Once payment is processed, a payment confirmation letter will be sent to both vendor and purchaser. The Vendor could later submit this email with the tax return for a refund.
What does this mean for the vendor?
Under new rules, an Australian resident vendor who sells of an Australian real property with a contract price of $750,000 or above should apply for a clearance certificate from ATO to ensure amounts are not withheld from his or her sale proceeds. Otherwise, the vendor has to be treated as a foreign resident seller, 12.5% of contract price withheld. However, A foreign resident may allow variating the withholding rate from the ATO. When any amount is withheld, the vendor would have to wait until lodgment of their next income tax return to recover the withheld amount.
Where there are multiple vendors selling the property, it is the total market value of the property that determines whether withholding is required by the purchaser. The amount of withholding will be in proportion to each vendor’s interest in the property, with the total withholding equal to 12.5% of the property’s sale price.
What does the Vendor need to do?
- Work out the residency status for tax purpose
The vendor has to work out his or her residency status for tax purpose. The term “foreign resident” is defined in subsection 995-1 of the ITAA, which is not the same as for the Foreign Investment Review or for immigration purpose.
- A vendor may obtain a clearance certificate
If the vendor is qualified as an Australian resident, he or she may entitle to obtain a clearance certificate from the ATO. As to multiple vendors, all parties on the certificate of title will require providing a clearance certificate when the total market value of the property has reached the threshold. The amount of withholding will be in percentage of each vendor’s interest in the property. If the vendor fails to provide the percentage of property ownership, the ATO will assume that the vendors have an equal percentage of property ownership.
- A Vendor may apply for a variation
If the vendor is not entitled to obtain a clearance certificate, he or she may allow variating the withholding rate by applying a variation application to the ATO. The withholding rate could be reduced from 12.5% to nil. Reasons for variation depend on the facts and circumstances of the particular transaction such as tax liability from this property selling is less than 12.5% of the consideration, Capital gains tax rollover claimed, Capital gains tax exemption applies, Capital gains tax asset acquired on or before 19 September 1985 and others.
When there are multiple vendors, the purchaser must consider each vendor’s circumstances separately in determining the amount to withhold from each vendor. Therefore, each vendor must lodge his or her own application.
It should be noted that not only the vendor may apply for variations, but also other entities such as the purchaser, creditor or mortgagee in possession to the property, which is considered as the “applicant” for this application may apply for a variation.
- Time for applying a clearance certificate and variation application
Any vendor may apply for a clearance certificate at any time they are considering the sale of the property. The ATO suggests that the vendor should apply for a clearance certificate at least 14 days before he or she requires it. A clearance certificate is valid for 12 months from the date of issue.
In the practice, it recommends that the vendor should include a clearance certificate or a variation notice in the contract if the consideration is expected to reach the threshold. This practice aims to avoid delays during the dispose process. The delay may affect to the completion of the property selling.
- How to lodge a clearance certificate or variation application
The ATO requires that the vendor completes the application online. Vendors may either complete and lodge the form themselves, or have it completed and lodged on their behalf by a third party such as a solicitor or an accountant. It alerts that conveyancers, real estate agents cannot complete the application on behalf of the vendor, who only allows entering the details into the online form according to a paper PDF version of the form completed by a vendor.
- The vendor’s action after a withholding
When the withhold arise, the vendor could not receive the total amount of the sale price. The vendor may eligible to refund the whole or party withhold amount after completing his or her income tax return lodgment.
For more information, please click here for the official site of ATO.
This article is written by Jin Wang; Edited by Luming Wang.