It doesn't only affect foreign residents
From 1 July 2016, new taxation legislation will take effect and impact on any property transaction where the purchase price is more than $2 million. The legislation is aimed at vendors that are 'foreign persons' for the purposes of taxation law to ensure their capital gains liability is discharged. However, despite the name, it will impact all property transactions valued over the threshold, irrespective of the involvement or otherwise of a foreign person.
The prima facie position is that for any sale contract entered on or after 1 July 2016 where the purchase price is $2 million or greater (Valid Transaction), the purchaser has a statutory obligation to withhold 10% of the purchase price at settlement from the vendor and pay that amount to the Australian Taxation Office (ATO). Following settlement the vendor applies for a tax credit in relation to the amount withheld by the ATO for the capital gains liability arising from the Valid Transaction.
The purchaser's obligation is discharged if the vendor provides the purchaser with a valid 'Clearance Certificate' from the ATO prior to settlement. The ATO will only issue a Clearance Certificate to a vendor that is not a 'foreign person' for taxation purposes.
Where the vendor is a foreign person, the purchaser must retain 10% of the purchase price and pay that to the ATO at settlement, unless the vendor provides a valid 'Variation Notice' in which case the purchaser must remit the amount stated in the notice. A 'foreign person' vendor can obtain a Variation Notice from the ATO if they are able to satisfy the ATO that a lower amount of withholding applies to the transaction (for example, if the vendor is selling the property at a capital loss).
Impact on Vendors in Valid Transactions
Any vendor that is not a foreign person can apply online for a Clearance Certificate from the ATO which remains valid for 12 months from the date of issue.
While Clearance Certificates are vendor specific and not property specific, it is vital that the name on the certificate matches the name of the registered proprietor on the title for the particular property.
Provided the valid Clearance Certificate is provided to the purchaser prior to settlement, the purchaser is not entitled to withhold 10% of the purchase price at settlement and the full sale proceeds are to be released to the vendor.
For any vendor that is a 'foreign person' for taxation law purposes, consideration must be given to the amount of capital gains tax that may be payable resulting from a Valid Transaction.
Impact on Purchasers in Valid Transactions
The base assumption for any purchaser involved in a Valid Transaction is that 10% of the purchase price will be withheld from the vendor at settlement and paid to the ATO.
If the vendor provides a clearance certificate – then provided the name on that certificate matches the name of the Registered Proprietor on the certificate of title for the land and it is valid at the time of service, then the purchaser's statutory duty in relation to the withholding is discharged.
If the vendor is a foreign person and is unable to obtain a clearance certificate, then the purchaser will withhold 10% of the purchase price at settlement and pay the same to the ATO, unless the vendor provides a variation notice, in which case the purchaser will pay the amount stated in the variation notice to the ATO.
It is important that the sale contract permits the purchaser to withhold 10% of the purchase price at settlement and pay that amount to the ATO in the absence of a valid clearance certificate or variation notice provided by the vendor prior to settlement.
If you planning on selling any property valued greater than $2 million and you are not a foreign person for taxation purposes, then you must obtain a valid clearance certificate from the ATO and provide the same to the purchaser prior to settlement. If you fail to do so, then the purchaser will be obligated to pay 10% of the purchase price to the ATO at settlement. A clearance certificate can be obtained online through the ATO website, however we recommend we undertake this on your behalf.
If you are buying any property valued in excess of $2 million, then you must be aware of your statutory obligation in relation to the new withholding payments. If in doubt, the base assumption is that the regime applies and in the absence of a clearance certificate or variation notice, you must withhold 10% of the purchase price at settlement from the vendor and pay the same to the ATO.
Any sale contract for a Valid Transaction needs to include special conditions dealing with the new foreign residents capital gains withholding regime to protect both parties to the transaction.
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.