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New withholding tax regime

31 March 2016

New legislation will require vendors selling a property for over $2 million to apply for a clearance certificate to avoid the purchaser withholding 10% tax from the purchase price.

The objective of the new law is to ensure foreign residents pay 10% tax on any profits earned from the sale of a taxable Australian property.

Under the new law, vendors selling a property for over $2 million must apply for a clearance certificate from the Australian Tax Office (ATO).

The ATO will then verify whether they should be treated as an Australian tax resident for the purposes of the transaction. If the purchaser is provided with a clearance certificate by the vendor they are not required to withhold the tax. 

If a clearance certificate isn’t provided and the transaction is not exempted, the purchaser will need to pay the vendor 90% of the purchase price and 10% to the ATO, regardless of whether the vendor is an Australian resident or not. 

Therefore, providing the purchaser with a clearance certificate will be an essential part of the conveyancing process for every vendor of real property in excess of $2 million in Australia. 

The new withholding tax regime applies to contracts entered into on or after 1 July 2016, and earlier option agreements if the option is exercisable on or after 1 July 2016. 

REINSW CEO Tim McKibbin said: “Agents need to understand this change so they can inform the vendor that they will not receive all of the proceeds of the sale unless they have a clearance certificate.

“I think the primary responsibility to assist the vendor to acquire the clearance certificate will fall to lawyers and conveyancers, however agents need to understand the ramifications and the process involved.

“If the vendor is not aware it could have a knock-on effect for other transactions in circumstances where the vendor needed those funds to retire debt or acquire other property.”

When required the purchaser must pay the withheld amount to the ATO on or before settlement. Therefore, a vendor should apply for a clearance certificate before their property is listed for sale, including if sold by auction where a clearance certificate is needed if sold for $2 million or more.

If a clearance certificate is issued, it is usually issued within 14-28 days and is valid for 12 months. Settlement timeframes will need to take into account the time taken to acquire the clearance certificate and provide some to the purchaser.

The new tax also applies to a wide range of transactions including mining, quarrying or prospecting rights, shares in a company or units in a unit trust.