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New foreign tax rule impact on agents

11 July 2017

The new foreign resident capital gains withholding tax threshold, brought in on 1 July 2017, will now impact all Australian residents selling properties above $750,000. 

The threshold has been reduced from $2m, a reduction that the REIA President Malcolm Gunning believes is misguided. You can read why here.

The law requires a purchaser to withhold 12.5% of the purchase price of a property and pay it to the Australian Tax Office (ATO) on settlement unless the seller obtains a clearance certificate.

Following settlement, the vendor applies for a tax credit in relation to the amount withheld by the ATO.

This means all Australian resident vendors need to apply for a clearance certificate to avoid their sale proceeds being withheld. The amount withheld was previously $2 million before 1 July 2017.

How can clients obtain a clearance certificate?

The ATO will only issue a clearance certificate to a vendor that is not a ‘foreign person’ for taxation purposes.

The certificate can be applied for online and is valid for 12 months from the date of issue and can be used for multiple property sales.

It should be provided before settlement to avoid the purchaser withholding the 12.5%. 

What if your client is a foreign person?

Where the vendor is a ‘foreign person’, the purchaser must retain 12.5% of the purchase price and pay it to the ATO at settlement.

However the vendor can apply for a ‘variation notice’ where they believe a withholding of 12.5% is inappropriate. Reasons for a variation could include:

  • a foreign resident not making a capital gain on the transaction (for example, because they will make a capital loss or a CGT rollover applies)
  • a foreign resident not otherwise having an income tax liability (for example, because of carried-forward capital losses or tax losses).

If the application is successful, the notice of variation will be provided within 28 days which should be shown to the purchaser before settlement to ensure the reduced withholding rate applies.

What types of property does this apply to?

All property, including vacant land, residential, commercial, strata title and community title schemes.

What does this mean for agents?

If you are appointed to sell a property and consider its value to be $750,000 or over, you should advise your vendor to apply for a clearance certificate asap. 

If your vendor is a foreign resident, you should advise them that 12.5% of the purchase price will be withheld at settlement by the purchaser and provided to the ATO, unless a successful variation notice is applied for.

Read the ATO fact sheet for agents on the withholding law here.