Capital gains withholding initially applied only to foreign residents for property transactions worth $2 million or more, when it came into effect on July 1, 2016.
However, starting July 1, 2017, it was extended to all property transactions valued over $750,000, regardless of the seller’s residency status.
How does Capital Gains Withholding work?
When purchasing a property valued at $750,000 or higher, the purchaser must withhold 12.5% of the purchase price and pay it directly to the ATO on settlement, unless the seller provides a clearance certificate or vendor declaration.
In addition, the seller must confirm with the ATO and purchaser that they are not a foreign resident to avoid withholding. Once the seller has provided the necessary documentation, any amounts withheld must be paid to the ATO through the appropriate form before the purchaser becomes the owner of the asset.
Which properties are subject to Capital Gains Withholding?
The property withholding regime will affect property transactions and transfers of property with market values above $750,000 for the following asset types:
– Australian real property;
– Vacant land, buildings, residential and commercial property.
– Mining, quarrying or prospecting rights where the material is situated in Australia.
– A lease over real property in Australia if a lease premium has been paid for the grant of the lease.
– Indirect Australian real property interests of 10% or more in an Australian entity whose underlying value is principally derived from Australian real property; and
– Options or rights to acquire any of the above asset types.
Define market value?
The market value of a property is determined by the purchase price negotiated between the seller and the purchaser at arm’s length. However, for non-arm’s length transactions, where the buyer and seller are related parties, require an independent valuation since the purchase price cannot be accepted as market value.
Do I need a clearance certificate?
Obtaining a clearance certificate is crucial for the seller to confirm that property withholding tax does not apply. To ensure a smooth settlement, the seller should provide the certificate to the purchaser before or at settlement. Failure to do so will result in the purchaser being obligated to pat 12.5% of the purchase price to the ATO.
Fortunately, the certificate can easily be requested online through the ATO’s website. However, it’s important to note that the application should be lodged well in advance of the settlement date. The certificate is only applicable to the specified entity and is valid for 12 months from the date of issue.
Additionally, it can be used for multiple disposals of real property during this period. For further information and guidance on various circumstances, please refer to the ATO’s website.
Is a vendor declaration required?
A seller may provide the purchaser with a vendor’s declaration to avoid the property withholding requirement for all other than real property transactions.
If the seller does not supply a declaration when requested, the purchaser should withhold 12.5% from the purchase price at settlement. A vendor’s declaration is valid for six months from the date it is signed by the seller.
The two types of vendor declarations are:
Where a purchaser believes a seller is a foreign resident (seller has an address outside Australia or sales proceeds are to be paid outside of Australia). They can request the seller make a declaration confirming their Australian tax residency. Alternatively, the seller may voluntarily provide a declaration to the purchaser.
2. Not an indirect Australian real property interest declaration
A seller may provide the purchaser with a declaration confirming that the membership interests they are disposing of are not indirect Australian real property interests. They can also confirm where an option is granted, that the membership interests subject to the option are not indirect Australian real property interests.
Is there any exemptions available?
Some property transactions are exempt from capital gain withholding, including:
1. Acquisition of ownership of a relevant property asset from a deceased estate.;
2. Seller expects to not incur a capital gain. (for example, due to incurring a capital loss or a Capital Gains Tax roll-over applies);
3. Seller will not have an income tax liability in Australia. (for example, due to carried-forward capital losses or tax losses); or
4. Likeliness of insufficient proceeds to cover the withholding and outstanding debt over the asset.
Exemption is not automatic. The seller must apply for the exemption/variation by completing an online application on the ATO website.
How is the withholding paid?
If an amount is withheld on the sale of a property by the purchaser, the seller will be able to lodge an income tax return with the ATO at the end of the income tax year. They can declare their taxable income (including any capital gain on the sale of the property) and claim the amount withheld as a credit against the tax payable.
However, where the seller does not have capital gains tax to pay on the sale, or the amount payable is less that the amount withheld, the excess may be refunded. Note that there are circumstances where an early tax return may be lodged to go through this process sooner.
Disclcaimer: The information provided within this article is general information only. None of the comments in these notes are intended to be advice, whether legal, financial product or professional. You should obtain specific advice regarding your particular circumstances from a tax or legal professional.
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