What is capital gains withholding?
When it first came in force on 1 July 2016, Capital Gains Withholding applied to foreign residents only, for property transactions valued $2 million or higher.
From 1 July 2017 capital gain withholding was expanded to apply to all property transactions where the market value is greater than $750,000, regardless of whether the seller is a foreign resident or not.
How does Capital Gains Withholding work?
The purchaser is required to withhold 12.5% of the purchase price of a property valued at $750,000 and higher, and pay this amount directly to the ATO on settlement, unless the seller obtains a clearance certificate or a vendor declaration.
We note in particular, that it is the seller’s responsibility to confirm with both the ATO and the purchaser that they are not a foreign resident in order to avoid the purchaser withholding on the sale.
Any amounts that are withheld must be paid to the ATO, with the appropriate form being lodged on or before the day the purchaser becomes the owner of the asset.
What 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.
What is market value?
The market value of a property to be the purchase price when it has been negotiated between the seller and the purchaser at arm’s length.
For non-arm’s length trasnactions, such as buyer and seller are related parties, the purchase price will not be accepted as the market value. The purchaser will then be required to seek an independent valuation.
What is a clearance certificate?
A clearance certificate confirms that the property withholding tax is not applicable. It is the seller’s responsibility to obtain a valid clearance certificate and to provide it to the purchaser at or before settlement, otherwise the purchaser has an obligation to remit 12.5% of the purchase price to the ATO.
The certificate can be requested online on the ATO website. Therefore, the ATO recommends lodging the application well in advance of the settlement date to ensure the certificate is ready before then. The certificate only applies to the entity specified, is valid for 12 months from the date of issue and can also be utilised for multiple disposals of real property over this period. Please refer to the ATO’s website for further details as it provides a comprehensive guide for various circumstances.
What is a vendor declaration?
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. The acquisition of ownership of a relevant property asset from a deceased estate;
2. The 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. The seller will not have an income tax liability in Australia (for example, due to carried-forward capital losses or tax losses); or
4. There is likely to be 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 declaring 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.
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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