Real Property: more withholding for more transactions
One of the less widely debated parts of this week’s federal budget are changes to the legislation which came into effect from 1 July 2016 to increase the rate and widen the scope of the Foreign Resident Withholding Tax. This legislation originally required a payment of 10% of the purchase price of a property being purchased from a ‘foreign resident’ vendor to be withheld by the purchaser and paid to the Australian Taxation Office (‘ATO’).
Where the property in question is land, a lease or mineral rights the definition of ‘foreign resident’ is anyone (including someone born to Australian parents and brought up in Australia who has never left these shores) who does not have a Clearance Certificate from the ATO. The original legislation related to real property sold for more than two million dollars and for those of us in South Australia and other jurisdictions with less expensive average property values its application has been relatively infrequent and largely confined to commercial property transactions. From 1 July 2017 this two million threshold will become $750,000.00. Given the mean price of a dwelling in Australia is over $650,000.00 this means the withholding rules will apply more properties including many more residential properties in all states and territories.
If you are selling real property you should apply well in advance for a Clearance Certificate. An electronic application can be lodged via the ATO website or a paper form can be downloaded from the website and sent to the ATO. A Clearance Certificate is valid for a year and must be supplied to a purchaser before settlement to prevent them withholding from the agreed price.
If you are a purchaser of real property worth more than $750,000.00 and you do not receive a Clearance Certificate from the vendor before settlement you must withhold from the proceeds or you may be personally liable to the ATO for the amount that should have been withheld.
Currently the withholding rate is 10% of the purchase price but the budget announcement stated that from 1 July 2017 it is to be 12½%.
As this is a withholding rather than a final tax the vendor is able to lodge an income tax return and claim a credit for the amount withheld. If the vendor’s tax is assessed at below the amount withheld they may receive a refund from the ATO. This is not a good substitute for a Clearance Certificate as it can be almost two years before a tax return is lodged and a refund credited.
For example: Jack sells his main residence for $800,000.00 on 10 July 2017 and does not realise he needs a Clearance Certificate. It is a common misconception that as one’s main residence is not generally subject to capital gains tax the withholding and Clearance Certificate rules will not apply. The purchaser is obliged to withhold 12½%, $100,000.00, as Jack has not given her a Clearance Certificate. Jack receives only $700,000.00 on settlement and is not pleased. His tax return for the year may not be lodged until May 2019 with his refund being paid in June 2019.
Those selling real property must ensure that contracts are drafted to take the withholding provisions into account. It is wise to protect your interest by providing for a delayed settlement where there is a delay in obtaining the Clearance Certificate. Equally, it is wise to provide for recourse against a buyer who withholds but does not remit the amount withheld to the ATO which may impact on the vendor’s ability to obtain a refund.
If you or your client has property on the market or about to go on the market which may sell for $750,000.00 or more now is the time to apply to the ATO for a Clearance Certificate.