Australian Sellers Beware! 3 Things You Need To Know About The New Withholding Tax Regime
From 1 July 2016, new legislation requires Australian residents selling real estate and other assets with a market value of $2million or more to obtain a clearance certificate from the ATO by settlement. The aim of the new withholding tax regime is to protect the integrity of the foreign resident capital gains tax regime, by ensuring that foreign sellers do not escape their liability to pay capital gains tax.
What is the new law?
The new law applies to certain assets worth at least $2million, including:
• real property (land, buildings, residential and commercial property)
• lease premiums and mining, quarrying or prospecting rights
• indirect interests in an entity that hold such assets
• an option or right to acquire such assets.
Should each seller within a transaction fail to provide a valid clearance certificate by settlement, the buyer is required to withhold 10% of the purchase price which is payable to the ATO immediately after settlement.
How does it work?
At the crux of this new legislation is the requirement that anyone selling property or assets in this cost bracket must obtain a clearance certificate, which confirms that the withholding tax is not to be withheld from the transaction. A seller must apply to the ATO for a clearance certificate and provide it to the buyer by the settlement date of the transaction. A seller’s failure to meet this deadline will cause a deduction in the sale proceeds, as 10% of the purchase price will be paid to the ATO.
A seller may apply for a clearance certificate at any time they are considering the sale of property, even before the property is listed for sale. The clearance certificate will be valid for 12 months and must be valid at the time the certificate is given to the buyer prior to settlement.
There are a number of forms, in relation to the clearance certificate, which are available from the ATO’s website:
• Clearance certificate application – for Australian residents.
• Rate Variation application – for foreign residents and other sellers not entitled to a clearance certificate, who believe that a withholding of 10% is inappropriate, in which case the seller can apply for a variation requesting a lower withholding rate be determined by the ATO.
• Purchase payment notification – completed by the buyer prior to settlement to notify the ATO of an impending payment following settlement of the transaction.
Issues for sellers
The recent introduction of this withholding tax legislation poses a number of issues for sellers:
• Australian sellers will have to be careful about entering into contracts with relatively short settlement periods. They will need to ensure that they have enough time to obtain a clearance certificate from the ATO.
• Foreign sellers will need to be especially careful with short settlement periods, as that will affect their ability to obtain Rate Variation. This might be crucial if the property’s mortgage payout exceeds 90% of the purchase price, given that in such cases the full 10% cannot be paid to the ATO.
• Sellers must note that the regime applies where the value of the asset is at least $2million regardless of whether a part interest only is being sold. If the seller is selling a 50% share in a house worth $2million, a clearance certificate must still be obtained otherwise the withholding tax will still apply.
• Multiple sellers must be aware that each seller is required to provide a clearance certificate.
If you’re an Australian resident contemplating selling real property worth at least $2million, you will need to obtain a clearance certificate before settlement. Otherwise, the new withholding tax regime stipulates that the buyer will withhold 10% of the purchase price and pay this to the ATO.