Property 101: Seller and buyer obligations with $2 million plus clearance certificates

GUEST OBSERVER

Where the land, or the interest in the land, is worth $2 million or more, the new law requires the purchaser to withhold 10 percent of the purchase price and send it to the ATO unless the vendor has obtained a ‘clearance certificate’ from the ATO and provided it to the purchaser prior to settlement.

This obligation arises regardless of whether the vendor is a foreign resident or not.

Parliament recently passed legislation amending the taxation law to impose withholding obligations on the purchasers of certain Australian assets – generally property purchased from a non-resident.  However, the changes will affect most purchases of property in Australia!

The amendments impose a 10 percent withholding obligation on purchasers of ‘Taxable Australian Real Property’ (generally, this means an interest in Australian land) from certain foreign residents, as well as certain ‘indirect Australian real property interests’ (such as shares in companies that own a lot of land) and options to acquire such assets.

The amendments will generally apply where the contract to purchase an applicable asset is signed on or after 1 July 2016.

Example

On 1 August 2016, Harvey enters into a contract to purchase a residential property in an affluent Sydney suburb for $2.5 million, with settlement proposed to occur on 1 October 2016.  He does not know whether the vendor is a foreign resident.

Despite many requests from Harvey’s lawyer, the vendor refuses to obtain a clearance certificate from the ATO to give to Harvey.

As Harvey is acquiring Australian land with a market value greater than $2 million and he has not received a clearance certificate from the vendor by the time settlement occurs, Harvey will be required to withhold and pay to the ATO $250,000, whether or not the vendor is an Australian resident.

The vendor will be able to apply for the certificate online BUT it is the purchaser’s responsibility to request it from the vendor. Ultimately, the purchaser is relying on their agent or solicitor to organise everything for them. Makes us wonder how many will forget so make sure you have a good one.

For more information, click here.