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Property withholding rules explained

The following is Information supplied by the Foreign Investment Real Estate Initiative, Public Groups and International – Australian Taxation Office.

New withholding rules on sales of property by foreign residents have been introduced at a time when foreign investment in Australia, including in residential real estate, is increasing. The rules will apply where real property contracts are entered into on or after 1 July 2016, but only apply to sales of residential property where that property has a market value of $2 million or more. Withholding does not apply to sales by Australian resident sellers, but these sellers will need to obtain a clearance certificate that they can provide to the purchaser.

The changes were announced in 2013 and became law earlier this year. The ATO has talked to real estate agents, conveyancers and legal practitioners to ensure the industry is prepared to help their clients meet their withholding obligations.

Withholding arrangements to make sure foreign residents pay capital gains tax on the sale of residential property exist in many countries, including in Canada, France, Spain, Japan and the USA.

Information for sellers and buyers

Assistant Commissioner Malcolm Allen said the new rules only apply to a limited number of sales of residential property under contracts entered into from 1 July 2016. Most property sales are for less than $2 million and are completely outside these rules. The withholding also does not apply to sales by Australian residents where a clearance certificate is provided to the buyer. For purchases of property with a market value of $2 million or more from a foreign resident seller, a 10 per cent withholding will be incurred on these transactions at settlement with the withheld amount being credited against any capital gains or income tax payable by the seller on the sale.

“This means Australian residents who are selling a taxable Australian property with a market value of $2 million or more need to obtain a clearance certificate from the ATO,” Mr Allen said.

“The clearance certificate will confirm that the 10 per cent withholding amount does not apply to the transaction. If a seller doesn’t provide a clearance certificate to the buyer by settlement, the buyer will be required to withhold 10 per cent of the sales price and pay this to the ATO.”

Where a buyer fails to withhold when they should, a penalty may be equal to the amount that was required to be withheld and paid. Interest will also be payable.

Sellers can claim the credit for the withheld amount paid to the ATO by lodging a tax return for the relevant year.

How to apply for a clearance certificate

Mr Allen said clearance certificate application forms are already available to download through the ATO’s website, and it is designed to be a straightforward process that should not take much time to complete for most sellers.

“Sellers can complete and lodge the form themselves, or it can be completed and lodged on their behalf by a third party, such as their solicitor or accountant,” Mr Allen said.

“There is no ATO fee for clearance certificate applications and we encourage all Australian residents who are looking to sell property with a value of $2 million or more to apply for a clearance certificate as early as possible in the sale process”

An online version of the form will be available from 27 June 2016. Where an application is submitted online, most certificates will be issued electronically within a few days. Paper applications may take up to 2-4 weeks to process.

“There may be some delays in cases where applicants have incomplete tax records, for example where tax returns have not lodged for the last two years. We will follow-up where we see evidence of poor tax behaviour, just as the Australian community would rightly expect of us,” Mr Allen said.

A clearance certificate is valid for 12 months from issue, and must be valid at the time it is made available to the buyer.

More information

Property withholding rules explained

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