Regardless of whether you are an Australian citizen or permanent resident, all vendors in relation to a conveyancing transaction with a sale price of $750,000 and above are deemed to be subject to the Foreign Resident Withholding Capital Gains Tax unless a clearance certificate is obtained from the Australian Taxation Office prior to settlement.

There are also other separate Federal and State legislative frameworks dealing with different aspects with regard to foreign purchasers. The Federal legislation deals with Foreign Investment Review Board (FIRB) approval required to be obtained by foreign persons before they purchase property and prescribing the types of property that foreign persons may purchase, depending on whether the property is purchased as a principal residence or as an investment.

The State legislation deals with duties levied upon purchases by foreign persons and prescribes a duty of an additional 7% of the purchase price of any property or share of property purchased by a foreign person.

The definition of a ‘foreign’ person differs between the jurisdictions – for example, a spouse of an Australian Citizen would usually not require FIRB approval to purchase a principal residence in Australia provided the property is purchased as joint proprietors, however that same spouse would be considered a foreign person under the State legislation if they have not obtained a Permanent Residency Visa (usually a second step process to obtaining an initial indefinite spousal visa) and would incur additional duty of 7% calculated on their share of the Contract Price for the property.

Penalties for non-compliance can be severe and in relation to the Federal legislation, can include notification to the Department of Immigration. If any purchaser is not an Australian Citizen, an Australian Permanent Resident, or a New Zealand Citizen with a Special Category Visa, you should contact us to discuss your situation, preferably before your purchase.

Foreign resident capital gains withholding payments

From 1 July 2016 all contracts with a sale price of $750,000 or above will need to be considered in the light of the new Foreign Resident Capital Gains Tax legislation. This legislation requires a Purchaser to withhold 12.5% of the purchase price on settlement and remit this amount to the Australian Taxation Office unless the Vendor provides a clearance certificate from the Australian Taxation Office.

Australian Vendors who are residents for taxation purposes who dispose of Australian real property with a market value of $750,000 or above will need to apply for a clearance certificate from the ATO to ensure amounts are not withheld from their sale proceeds and we will provide you with the detail of how to make this application. A vendor may apply for a clearance certificate at any time – there is no need to wait for the property to be sold. A certificate, once issued, is valid for 12 months for all property transactions in the name of that specific Vendor.  A clearance certificate must be provided by each Vendor.

Vendors that are non-residents for taxation purposes may not be able to obtain a clearance certificate without undertaking a second step variation application process and in that case, 12.5% of the sale price will be deducted by the purchaser on settlement and remitted to the Australian Taxation Office.

If you are a vendor and your property is likely to sell for $750,000 or above, please contact us to discuss the process and your obligation to pay the 12.5% withholding payment.

The 12.5% withholding payment is not a final payment and if a clearance certificate cannot be obtained prior to settlement an Australian resident vendor may still be able to recover part or all of the withholding payment on lodgement of their next income tax return, although this may of course be some time off. If a clearance certificate is returned indicating that a liability is payable and if the Vendor believes that there should be no liability an application for a variation may be made – an application for a variation could be applied for – this is considered manually by the Australian Taxation Office and will undergo a more lengthy return time – therefore it is important to act quickly to ensure that all steps are taken to ensure any liability is correctly calculated.  If you are a non-resident Vendor for taxation purposes we recommend you seek your accountant’s advice in relation to the initial application for the clearance certificate and in relation to any variation application to be made.

This new legislation and the administrative requirements of the scheme will increase compliance obligations and depending on the nature of the property may lead to pre-settlement disputes between vendor and purchaser in relation to establishing the “sale price” and therefore the cost base on which the 12.5% is to be calculated. A failure to comply leads both the vendor and the purchaser liable to penalties.