Foreign resident capital gains withholding payments for property purchases over $750k
When a foreign resident disposes of taxable Australian property (both directly and indirectly held), the purchaser is required to withhold and pay 12.5% of the purchase price to the ATO. Failure to withhold may result in significant penalties for the purchaser. Australian resident vendors will be required to apply for a clearance certificate (thereby proving their resident status) to ensure funds are not withheld from sale proceeds. Consideration will need to be given to the timing of compliance obligations so as not to cause settlement delays.
Capital Gains withholding requirements
Foreign resident capital gains withholding (FRCGW) applies to vendors disposing of certain taxable property under contracts entered into from 1 July 2016.
The current FRCGW tax rate is 12.5% and applies to real property disposals where the contract price is $750,000 or more.
For contracts entered into from 1 July 2016 and before 1 July 2017, the FRCGW withholding tax rate is 10% and applies to real property disposals where the contract price is $2 million and above.
What types of Australian assets are affected?
The withholding tax is limited to these types of taxable Australian assets:
- real property situated in Australia – land, buildings, residential and commercial property;
- mining, quarrying or prospecting rights if the assets are situated in Australia;
- interests in Australian entities that predominantly hold the above assets (indirect interests).
Excluded from this obligation is residential property valued at less than $750,000, arrangements conducted on the stock exchange, and arrangements which are already under an existing withholding arrangement.
Impact on transactions
Australian resident vendors will be required to apply for clearance certificates to ensure that funds are not withheld from sale proceeds. Vendors can apply for a clearance certificate at any time, even before a property is listed for sale, and they are valid for 12 months.
Purchasers must withhold 12.5% of the purchase price if they have knowledge (or a reasonable belief) that the vendor is a foreign resident, or if they have not been provided with a Clearance Certificate by the settlement date. The required amount must be paid to the ATO on or before the day the purchaser becomes the owner of the property. Where an amount has been withheld, the purchaser must lodge a Purchaser Payment Notification form with the ATO to provide details of the transaction.
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