Australia - Foreign resident capital gains withholding payments (FRCGW)

From 1 July 2017 Australian residents selling real estate with a market value of A$750,000 or more will need to apply for a clearance certificate from the Australian Taxation Office (ATO) to ensure amounts are not withheld from the sales proceeds.

Where a valid clearance certificate is not provided by settlement, the purchaser is required to withhold 12.5% of the purchase price and pay this to the ATO.

A vendor who is a genuine non-resident will not be able to obtain a clearance certificate from the ATO, or make a vendor declaration that they are a resident, so the purchaser will need to withhold the required percentage from payments made to the foreign resident vendor.


Background

This withholding legislation assists the collection of foreign residents’ Australian tax liabilities.
The FRCGW rules impose a non-final withholding tax payment obligation on purchasers of certain taxable Australian property from foreign resident vendors and commenced on 1 July 2016.
The FRCGW applies to all Australian tax residents, not just foreign residents.  The FRCGW presumes all vendors to be foreign residents unless and until they take the required steps to prove otherwise.

Australian resident vendors can avoid the requirement of the purchaser to withhold by providing a clearance certificate to the purchaser prior to settlement.  Foreign resident vendors can apply for a variation where appropriate.
Broadly, the purchaser is required to withhold 12.5% (previously 10%) of the purchase price and send this to the ATO; the vendor then claims a credit for the amount withheld.
It applies to real property disposals where the contract price is A$750,000 or more (previously A$2m)

The types of taxable Australian property this applies to includes vacant land, buildings, residential and commercial property, and certain other assets such as shares, units, rights and options.
The foreign resident vendor must lodge an Australian tax return at the end of the financial year, declaring their Australian assessable income, including any capital gain derived from the disposal of the asset.

 

What this means for purchasers?

Where a foreign resident vendor disposes of Australian real property with a market value of A$750,000 or more, the purchaser will be required to withhold 12.5% of the purchase price and pay it to the ATO unless the vendor provides the purchaser with a variation notification.

A purchaser will need to receive a clearance certificate from an Australian resident vendor by settlement otherwise withhold 12.5% of the purchase price and remit to the ATO.
Purchasers should request a clearance certificate from the vendor well before settlement date.

 

What this means for vendors?

Australian resident vendors who dispose of Australian real property with a market value of A$750,000 or more will need to apply for a clearance certificate from the ATO to ensure amounts are not withheld from their sale proceeds.  This must be provided to the purchaser by settlement.
Australian resident vendors can apply for online at www.ato.gov.au/FRWT_Certificate.aspx for a clearance certificate which will be valid for 12 months.
When the vendor is not entitled to a clearance certificate because they are a foreign resident, but believes the withholding of 12.5% is inappropriate they can apply to the ATO for a variation online at www.ato.gov.au/frcgw_variation.aspx.

For example: a foreign resident is not making a capital gain due to the use of prior period capital losses or a capital loss is generated on the disposal of the property

 

Multiple vendors

Where there are multiple vendors, each vendor needs to provide a separate declaration.

 

When will this apply?

For contracts that were entered into from 1 July 2016 and before 1 July 2017, the FRCGW withholding tax rate was 10% and applied to real property disposals where the contract price was A$2m or more.
For contracts that are entered into on or after 1 July 2017, the FRCGW withholding rate is 12.5% and applies to real property disposals where the contract price is A$750,000 or more.

 

Advice

Further information is available at www.ato.gov.au/frcgw

Registered tax agents, conveyancers and real estate agents can play an important role in ensuring that their clients are aware of the withholding obligations.

However, the liability for the withholding and responsibility for payment to the ATO falls solely on the purchaser.

 

From our australian member : McGregorWest Chartered Accountants & Advisors

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