On 22 June 2017, the Government gave Royal Assent to a tax law amendment that has received very little publicity but will have widespread ramifications for most transactions involving Australian property from 1 July 2017 onwards.
The amendments were made to the Foreign Resident Capital Gains Withholding Payments regime (a potentially misleading name as the measures impose significant penalties on local purchasers who might be caught napping on what should otherwise be a straightforward property acquisition).
What the changes mean for purchasers
From 1 July 2017, all purchasers of Australian real estate worth $750,000 or more will be required to obtain an ATO clearance certificate from the vendor which certifies that the vendor is an Australian tax resident. In the absence of a clearance certificate, the purchaser is required to withhold 12.5% of the purchase price and pay this to the Australian Taxation Office (ATO).
The measures also apply to certain other property transactions, including certain leases, mining rights, and indirect property interests held through an entity structure. In this bulletin, we are limiting our comments to direct purchases of Australian real estate.
In the event that a purchaser fails to obtain a clearance certificate and does not remit the required amount to the ATO, the purchaser runs the risk of being penalised 100% of the amount that they failed to withhold, plus the general interest charges that have accrued in the meantime. The laws place full responsibility with the purchaser to obtain the necessary clearance certificate, and failure to do so could be disastrous. Having just settled on a property purchase of $1.5 million plus stamp duty, a purchaser in breach of these rules would be slugged with an additional $187,500 penalty, plus interest.
The most important thing to note here is that this regime applies to all property transactions where the value of the property is $750,000 or more. This includes the sale of property by an Australian resident vendor to an Australian resident purchaser. A quick glance at median house prices across the country reveals just how far-reaching these measures will be.
These rules have been in place since 1 July 2016, albeit at the higher threshold of $2 million and a withholding rate of 10%. The changes that took effect from 1 July 2017 lower the threshold and increase the withholding rate, and in doing so they increase the scope of the legislation significantly.
It might be expected that simple changes to pro-forma sale documents and contracts will address this issue and make the provision of a clearance certificate a standard part of the pre-sale process. So far, however, we are yet to see this become a widespread practice and have seen instances where both the property agent and the conveyancer have allowed a transaction to proceed without a vendor clearance certificate.
How to obtain the relevant documentation
Obtaining a clearance certificate is a relatively straightforward process and vendors can obtain a certificate through their tax agent or complete an on-line application directly at https://www.ato.gov.au/FRCGW. Certificates are generally issued within a few days, although the ATO suggest that in some cases it may take 14–28 days.
In circumstances where the vendor is a foreign resident and the 12.5% withholding amount does apply, it is important that the purchaser withhold the appropriate amount at settlement and remit to the ATO. The legislation discharges a purchaser from all liability to pay a vendor the portion of the total purchase price that is required to be paid to the ATO under these provisions.
This bulletin has been prepared to raise general awareness of recent changes to this regime and should not be taken as specific advice in relation to any transaction or specific set of circumstances.
If you would like to discuss any aspect in more detail, or understand how they might apply in your circumstances, please contact Aaron Fitchett or Michael Cortis of our office on (03) 9851 9000.
*The foreign resident 12.5% withholding regime is very broad and has application beyond the scope of this bulletin, which has been prepared as a general alert for potential interested parties.