ATO and Foreign Resident Capital Gains Withholding Tax – Changes Every Person Needs to Know when Selling or Buying Property in Australia

This paper was co-authored by Kellie Cook, Senior Associate (previously with Kott Gunning Lawyers)

The settlement process when selling or buying real property or interests in real property in Australia has changed. The purpose of these changes is to assist the Australian Taxation Office with the collection of capital gains tax from foreign residents.

These changes took effect on and from 1 July 2016 – and only apply if:

  • the contract for sale is entered into on or after 1 July 2016.  If a contract is entered into before 1 July 2016, regardless of when the sale settles, this new process does not apply;
  • the asset being acquired is a relevant asset;
  • the seller of the property is a foreign resident;
  • the purchase does not fall within one of the exclusions.
Relevant Asset

The new procedure is not relevant for only foreign residents, and applies to real property and interests in real property, including:

  • vacant/residential/commercial land with a market value of $2,000,000 or more
  • certain mining rights
  • certain leasing rights

The changes also apply to assets known as ‘other assets’, including:

  • indirect Australian real property interests – being an interest in an Australian entity (e.g. as a shareholder) which has the majority of its assets in any of the above real property interests
  • options or rights to acquire any of the above real property or indirect real property
Foreign Residents & Exceptions

The most important aspect of the change, is that unless one of the exceptions applies, it requires the buyer to withhold 10% of the purchase price from the seller and pay it to the Australian Taxation Office (withholding payment). The seller may then, provided they have followed the process, claim a credit for the withholding payment when completing their next tax return.

As the changes are aimed at the collection of capital gains tax from foreign residents, there are exceptions for sellers that are not foreign residents, provided they follow the correct procedure.

For the exceptions to apply, the seller needs to satisfy the buyer that it is not a foreign resident. The seller can do this as follows:

For real property with a value of more than $2,000,000

If the seller is an Australian resident and they obtain a valid clearance certificate from the Australian Taxation Office prior to settlement.  A valid clearance certificate confirms that the withholding payment is not applicable to the sale. If this certificate is obtained before settlement and provided to the buyer, then the buyer is not obliged to make the withholding payment to the Commissioner.

A clearance certificate is valid for 12 months from the date of issue, and can be obtained prior to a property being listed or sold, but must be received and given to the buyer before settlement to avoid the withholding payment.

For any other asset type, either:

  • a valid vendor declaration, confirming that the seller is not a foreign resident, will need to be signed; or
  • a valid vendor declaration, confirming that the interest (e.g. shareholder) is not an indirect Australian real property asset.

A vendor’s declaration is valid for 6 months, and is only valid if the buyer does not know the declaration to be false.

What should you do next?

The changes that have taken effect are detailed and wide reaching, and stipulate set procedures that need to be followed. A failure to comply with the new process can result in penalties being applied.

Any person or entity that is contemplating the sale or purchase of any Australian real property assets or interest should determine if these changes apply to the transaction.

The above information is only intended as a general and brief overview of the changes and the new process. This information is not intended to cover all aspects of the new procedure and specific advice should be sought on the basis of individual circumstances.

If you would like more detailed information on the changes and/or the impact they may have on you or a proposed asset sale, please contact partner Emma Leys.

Also read the Update Changes to Threshold and Rate for Foreign Resident Capital Gains Withholding Payments (May 2017)

The information published in this paper is of a general nature and should not be construed as legal advice. Whilst we aim to provide timely, relevant and accurate information, the law may change and circumstances may differ. You should not therefore act in reliance on it without first obtaining specific legal advice.