Property 101: Foreign residents’ capital gains withholding tax regime

Be careful if you are buying or selling property over $2 million in value.

The Australian Government has introduced a new foreign residents’ capital gains withholding tax regime which applies to foreign residents selling real property in Australia with a market value of more than $2 million. It requires the purchaser, where the vendor is a foreign resident, to pay an amount equal to 10% of the purchase price.

The obligation is upon the purchaser to ascertain if the vendor is a foreign resident and if so, pay the withholding tax upon completion of the sale of the asset.  If the purchaser:

• Knows or has reasonable grounds to believe the vendor is a foreign resident; or
• The purchaser does not reasonably believe that the vendor is an Australian resident; and
• Has a record about the purchase indicating that the vendor has an address outside Australia; or
• Is authorised to provide a financial benefit (e.g. make a payment to a place outside of Australia) whether to the vendor or to anybody else;

then the legislation will introduce a Clearance Certificate model to provide certainty to purchasers regarding their withholding obligations.

The Clearance Certificate confirms that the withholding tax is not to be withheld from the transaction.  Therefore, in order to avoid an amount being withheld and paid to the Australian Tax Office, the vendor can obtain a Clearance Certificate from the ATO when the asset is being disposed of.  The ATO will issue a Clearance Certificate where they have no reason to believe the vendor is or will be a foreign resident during a specific period, including the time the transaction is entered into.  It is the vendor’s responsibility to obtain this Clearance Certificate and provide it to the purchaser at or before settlement.

At the moment, there is an approximate delay of 6 weeks in obtaining a Clearance Certificate and we recommend to vendors to obtain a Clearance Certificate as soon as possible, if they are intending to sell the Australian real property on or after 1 July 2016.

Should you require any assistance with this foreign residents’ capital gains withholding tax, then please do not hesitate to contact us for advice and assistance in applying for a Clearance Certificate.

Julian Peters is special counsel & notary public with Aitken Lawyers and can be contacted here.