How Foreign Resident Capital Gains Withholding Tax affects all sellers (and not just foreign residents)

Since July 2017, the Australian Tax Office (ATO) implemented changes to its Foreign Resident Capital Gains Withholding tax (FRCGW) measure that may impact you. This doesn’t only affect foreign residents, and is something that Australian residents need to keep in mind when buying or selling a property.  

WHAT IS THE FOREIGN RESIDENT CAPITAL GAINS WITHHOLDING TAX?

Assisting with the collection of foreign residents’ Australian tax liabilities, the FRCGW imposes an obligation on purchasers to withhold 12.5% of the purchase price and pay it to the ATO. This applies to all sellers of properties over $750,000, regardless of nationality.

If an Australian resident for tax purposes is selling their property, they will need to apply to the ATO for a Clearance Certificate to show this extra tax doesn’t apply. Failure to provide this means that the buyer of the property is required to withhold 12.5% of the sale price and pay it on behalf of the seller to the ATO.

WHAT IS A CLEARANCE CERTIFICATE?

A Clearance Certificate is issued by the ATO and provides confirmation that the withholding tax is not applicable to the settlement transaction. For sellers who are classified as ‘Australian Residents for tax purposes’, you can apply for a Clearance Certificate either via your accountant or directly on the ATO website. 

The application is straightforward and quick to complete for most sellers, and can even be lodged on your behalf by your accountant or solicitor.

HOW DO I KNOW IF I AM AN ‘AUSTRALIAN RESIDENTS FOR TAX PURPOSES’?

Visit the ATO’s website to find out more. Alternatively, speak to your accountant prior to selling your property.

WHAT IF I CAN’T OBTAIN A CLEARANCE CERTIFICATE?

If a seller is unable (or unwilling) to obtain a Clearance Certificate prior to settlement, the buyer must withhold 12.5% of the purchase price and pay it to the ATO on behalf of the seller.

The seller is then deemed a foreign resident vendor and must lodge a tax return at the end of the financial year, declaring their Australian assessable income, including any capital gain from the sale of the property. The seller may claim a credit for any withheld amount paid to the ATO as part of the property settlement in their next tax return.

If you are a foreign resident, you can also apply to the ATO either directly, or via your accountant for a Variation to reduce the amount payable to the ATO under the FRCGW measure.

WHAT IF THERE ARE MORE THAN ONE SELLER OR OWNER?

When multiple sellers or owners are involved, each should apply for a separate Clearance Certificate in their own name.

WHEN SHOULD I APPLY FOR A CLEARANCE CERTIFICATE?

Applying for the Clearance Certificate online is designed to be a straightforward process and not take a lot of time for most sellers. If your situation requires support, your accountant or solicitor is able to lodge on your behalf. We recommend that you allow 14-28 days to receive your Clearance Certificate, and the process can be as soon as you list the property for sale. Once approved, the Clearance Certificate is valid for 12 months from the date of its issue. 

WHAT IF I HAVE QUESTIONS ABOUT FOREIGN RESIDENT CAPITAL GAINS WITHHOLDING TAX?

The above information is provided to you for general purposes only, and KDD Conveyancing are not Tax Agents. 

We recommend speaking to your accountant or registered tax agent for advice on your circumstances. Alternatively, the ATO website has more information on different situations.