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New withholding tax rules for $750,000-plus properties

From 1 July 2017, the withholding tax rules that were introduced last July for properties $2 million and above, will now apply to all property transactions where the market value of the property is $750,000 and above.

 

Summary

The new laws require a purchaser to withhold 12.5% of the purchase price of real property valued at $750,000 and above and to pay that amount to the Australian Taxation Office (ATO) on settlement unless the seller obtains a clearance certificate.

The new laws will start on 1 July 2017 and are aimed at home owners that are ‘foreign persons’.  

However, these laws will impact all property transactions valued $750,000 and over, irrespective of whether the home owner is a foreign person or not.  

For any sale contract entered into on or after 1 July 2017 where the purchase price is $750,000 or greater, the purchaser has a statutory obligation to withhold 12.5% of the purchase price at settlement from the home owner and pay that amount to the ATO unless the home owner can provide a clearance certificate. 

Following settlement, the home owner applies for a tax credit in relation to the amount withheld by the ATO for the capital gains liability arising from the transaction.

This means that Australian resident home owners who are selling property with a market value of $750,000 or above will need to apply for a clearance certificate from the ATO to ensure that their sale proceeds are not withheld. 

 

What does this mean?

Australian resident owners

  • If you are unsure about the ultimate purchase price but there is some prospect that it may sell for $750,000 or above (for example, it is being sold at auction and the purchase price is unknown or it is being sold by expression of interest etc) you should  apply for a clearance certificate from the ATO as soon as practicable to avoid 12.5% of the purchase price being withheld at settlement.

Foreign resident owners

  • If the purchase price is $750,000 or above and the home owner is a foreign resident, 12.5% of the purchase price will be withheld at settlement by the purchaser and provided to the ATO.  

How can home owners obtain a clearance certificate? 

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

Any home owner 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. The certificate may be used for multiple property sales within the 12 month period.    

If a valid clearance certificate is provided to the purchaser prior to settlement, the purchaser is not entitled to withhold 12.5% of the purchase price at settlement and the full sale proceeds are to be released to the home owner.

How do Australian residents obtain a clearance certificate?

A home owner who is an Australian resident can obtain a clearance certificate by making an application to the ATO.  

If the home owner is automatically assessed as an Australian resident, a clearance certificate will be issued within days of the application however, the process may take longer for more complex applications.   

When does the clearance certificate have to be given?

Australian resident home owners must give the clearance certificate to the purchaser on or before settlement occurs to avoid the purchaser withholding 12.5% of the purchase price.

What if my client is a foreign person? 

Where the home owner is a ‘foreign person’, the purchaser must retain 12.5% of the purchase price and pay that to the ATO at settlement, unless the home owner provides a valid ‘Variation Notice’ in which case the purchaser must remit the amount stated in the notice. 

When will the new laws apply?

The new laws will apply to sale contracts (for $750,000 and above) entered into on or after 1 July 2017

What types of properties do these rules apply?

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

 

For any further information, or to discuss your own personal needs. Please contact our office and one of our sales agents will guide you through and assist you.