Foreign Resident Capital Gains Tax Withholding Scheme – What are the changes to the conveyancing process?

What is it?

With effect from 1 July 2016 new legislation has come into operation, whereby when a foreign resident disposes of certain taxable assets, the buyer of that asset will be required to withhold 10% of the purchase price and pay that amount to the Australian Tax Office (ATO).

Why is it needed?

The Scheme was enacted in order to ensure that foreign residents meet their Australian tax liabilities following the sale of an asset.

How does the Scheme affect the conveyancing process?

One of the relevant assets under the Scheme is real property with a market value over $2m. As a starting point all sellers of real property with a market value over $2m will be deemed to be foreign residents unless and until they obtain a clearance certificate from the ATO and present it to the buyer prior to settlement.

If the seller provides this clearance certificate to the buyer prior to settlement, then no withholding of the purchase price will be required. If the seller fails to provide the certificate, then the buyer must pay the 10% withholding tax to the ATO at settlement. This may prove difficult in practice (as usually cheques are collected at settlement) and we have been advised that the ATO will grant a 2 business day grace period.

It is important to note that it is the buyer’s responsibility to withhold, and pay, the withholding tax. The buyer may incur significant penalties if they fail to do so or they may be subject to interest charges if they are late in making the payment to the ATO. Even if the buyer knows that the seller is not a foreign resident, a clearance certificate must still be produced by the seller in order for the buyer to be removed from this obligation.

How does the seller obtain a clearance certificate?

The seller, or their legal practitioner (but not conveyancers who are not legal practitioners or tax agents), can apply for a clearance certificate at any time they are considering disposing of real property with a market value over $2m.

However, it is recommended that a seller applies for the clearance certificate as soon as they decide to sell the property. The ATO has indicated that, in straightforward cases, the certificate will be provided within days of the application being submitted. However, additional processing times of up to 28 days can be expected for applications which contain data irregularities or for high risk or unusual applications.

The clearance certificate is seller, not transaction, specific and so it remains valid for the sale of all assets by that seller for a period of 12 months. This also means that if there is more than one seller then the buyer must ensure that a clearance certificate has been provided by all sellers. The clearance certificate must be valid at the time it is provided to the buyer. A clearance certificate cannot be applied for retrospectively. If the seller is not entitled to a clearance certificate but believes a withholding of 10% is inappropriate, then they can apply to the ATO for a variation.

Examples

Example 1 – Failure by seller to produce a valid clearance certificate

On 1 August 2016, Mrs Jones enters into a contract to purchase a residential property in an affluent Sydney suburb for $2.5m, with settlement proposed to occur on 12 September 2016. Mrs Jones does not know whether the seller is a foreign resident. Despite many requests from Mrs Jones’ lawyer, the seller refuses to obtain a clearance certificate from the ATO. As Mrs Jones is acquiring real property with a market value greater than $2m then, in the absence of a clearance certificate being provided by the seller prior to the settlement date, Mrs Jones will be required to withhold and pay to the ATO the sum of $250,000 (representing 10% of the purchase price), whether or not the seller is an Australian resident.

Example 2 – Sale by Auction

Mr Smith decides to sell his wonderfully renovated 4 bedroom, 3 bathroom detached property with pool and tennis court in the leafy eastern suburbs of Melbourne. After speaking with his Real Estate Agent, who has advised him that similar properties in the area have recently sold for approx. $2.2m., Mr Smith decides to auction the property and he sets the reserve price at $1.8m. Now, using a little common sense, Mr Smith can determine that the chances of him obtaining over the reserve price and beyond a $2m sales price are extremely high. In this situation the ATO advises that Mr Smith errs on the side of caution and applies for a clearance certificate before he puts his home on the market. If the property does indeed sell for over $2m then Mr Smith has avoided the possibility of not being able to obtain the clearance certificate in sufficient time before the settlement date.

Standard contracts

New versions of the standard form contracts in NSW, Victoria and Queensland have been released to accommodate these changes. For the sale of properties over $2million in other states and territories, special conditions will need to be inserted in the contract to cover the buyer and seller’s obligations.

Elaine Moar

Legal Advisor

Elaine Moar is a Legal Advisor at lawlab, a specialist legal services provider for property transactions large and small across Australia.