New tax requirements for property vendors and purchasers23 June 2016
From 1 July 2016, a number of changes will apply to transactions where a freehold property with a market value of $2 million or more is being purchased or sold.
Important changes affecting vendors
Australian-resident vendors of real property with a market value of $2 million or more will need to apply for a clearance certificate to confirm they are not a foreign entity. The certificate must be provided to the purchaser before settlement to ensure that no amount is withheld from the sale proceeds. A clearance certificate can be obtained from the ATO by the vendor (or their agent) by completing the Foreign Resident Capital Gains Withholding Clearance Certificate Application.
A clearance certificate form lodged online can take up to 14 days to be processed and is valid for 12 months after it is issued. Vendors may want to apply for a clearance certificate before listing their property.
If the vendor is not entitled to a clearance certificate but believes a withholding rate of 10% is inappropriate, they can apply for a variation by completing the Foreign Resident Capital Gains Withholding Rate Variation Application requesting that a lesser withholding rate be applied. The vendor must provide notice to the purchaser of the variation prior to settlement.
Important changes affecting purchasers
For real property transactions with a market value of $2 million or more, the purchaser must withhold 10% of the purchaser price, unless the vendor provides the purchaser with a clearance certificate by the settlement date. If an amount is withheld, the purchaser must complete the Foreign Resident Capital Gains Withholding Purchaser Payment Notification form, which provides the ATO with details about the vendor, purchaser and the asset being acquired.
If a purchaser is required to withhold an amount, they must pay it to the ATO without delay. The penalty for failing to withhold is equal to the amount that was required to be withheld and paid.
The new regime applies when parties enter into a contract to sell, transfer or assign any of the following on or after 1 July 2016:
- any interest in Australian land, buildings, residential or commercial property (including a lease)
- a mining, quarrying or prospecting right for resources situated in Australia
- a 10% or more interest in an Australian entity that predominantly holds any of the above assets, or
- an option or right to acquire any of the above.
The withholding regime will also apply to contracts that arise out of an option agreement entered into before 1 July 2016, but exercised after 1 July 2016.
There are a number of transactions that are excluded from the new withholding regime, including any real property transactions with a market value of less than $2 million, transactions listed on an approved stock exchange and where the foreign resident vendor is under external administration or bankrupt.