On 9 May 2017 as part of the budget, the Government announced proposed changes to the Foreign Resident Capital Gains Withholding (FRCGW) rate and threshold.
The following changes will apply to contracts entered into on or after 1 July 2017:
- For real property disposals where the contract price is $750,000 and above (currently $2 million).
- The FRCGW withholding tax rate will be 12.5% (currently 10%).
The existing threshold and rate (listed above) will apply for any contracts that are entered into before 1 July 2017, even if they are not due to settle until after 1 July 2017.
Broadly, where a foreign resident disposes of certain taxable Australian property, the purchaser is required to withhold an amount from the purchase price and pay that amount to the Australian Taxation Office (ATO).
Australian resident vendors selling real property will need to obtain a clearance certificate from the ATO prior to settlement, to ensure they don’t incur the 10% (12.5% from 1 July 2017) non-final withholding.
This existing withholding legislation assists the collection of foreign residents’ Australian tax liabilities. It imposes an obligation on purchasers to withhold 10% (12.5% from 1 July 2017) of the purchase price and pay it to the ATO, where a vendor enters into a contract on or after 1 July 2016 and disposes of certain asset types (or receives a lease premium for the grant of a lease over Australian real property).
The foreign resident vendor must lodge a tax return at the end of the financial year, declaring their Australian assessable income, including any capital gain from the disposal of the asset. A tax file number (TFN) is required to lodge a tax return; they will need to apply for a TFN if they don’t have one. The vendor may claim a credit for any withholding amount paid to the ATO in their tax return.
- Australian resident vendors can avoid the 10% (12.5% from 1 July 2017) withholding by providing one of the following to the purchaser prior to settlement:
- for Australian real property, a clearance certificate obtained from the ATO (Blaze Acumen can obtain this on your behalf)
- for other asset types, a vendor declaration they are not a foreign resident.
- Foreign resident vendors may apply for a variation of the withholding rate or make a declaration that a membership interest is not an indirect Australian real property interest and therefore not subject to withholding.
- Purchasers must pay the amount withheld at settlement to the Commissioner of Taxation.
Legislation is currently being developed for this proposed change.
Please keep this reduced threshold of $750,000 in mind when selling any real estate and contact us to obtain a clearance certificate to avoid 12.5% being withheld at settlement.