23 June 2017

Impact on property sales of $750,000 or more

On 1 July 2017, the proposed changes to the foreign resident capital gains withholding (FRCGW) rate and threshold will take effect.

These changes will apply to contracts entered into on, or after 1 July 2017 for real property disposals where the contract price is $750,000 and above.  The FRCGW tax rate will also change from the existing rate of 10% to 12.5%. 

The existing threshold of $2 million and10%  rate will still apply for any contracts entered into before 1 July 2017 even if they are not due to settle until after 1 July 2017.

The reduction to the threshold from $2 million to $750,000 will result in many more properties requiring a clearance certificate for exemption of the withholding.  The Australian Taxation Office (ATO) can only grant clearance certificates to a seller who is an Australian resident.  

Important: Australian resident sellers of real property with a market value of $750,000 or above must apply for a clearance certificate to ensure no funds are withheld from their sale proceeds.

An essential part of the real estate process is the ascertaining and communicating of all available material facts to all the parties in a transaction.  If the property is sold at $750,000 or more, agents will need to disclose to both the seller and the buyer the requirement for the seller to obtain the certificate, or if the seller is not eligible for exemption, advise the buyer to withhold the 12.5% of the purchase price and pay this to the ATO. 

This information may be important to a party in deciding whether to proceed with a particular transaction.  A seller required to pay a 12.5% FRCGW on sale of a property may decide against selling the property or they may re-evaluate their selling price for the property. 

If the seller does not provide the clearance certificate before settlement, the purchaser will be required to withhold 12.5% of the purchase price and must pay this to the ATO.  This may affect their decision to buy the property in question.

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 seller for the sale of multiple properties while valid. 

If the seller is automatically assessed as an Australian resident, a clearance certificate will be issued electronically by the ATO within days of the application being submitted.  However, if there are data irregularities or exceptions, the ATO advises that some manual processing may be required and the clearance certificate will be provided within 14–28 days.

Further information and the Foreign resident capital gains clearance withholding certificate application form can be obtained by visiting the ATO website.