Are you liable for the new property withholding payments?
If you’re selling an investment property on or after July 1, 2016, and it’s valued at $2 million or more and you’re an Australian resident, you will need to obtain a property withholding clearance certificate from the Australian Tax Office (ATO), otherwise the buyer will have to withhold 10 percent of the sale price and forward it to the ATO. If you’re not an Australian resident and you’re selling property valued at $2 million or more, then the transaction will be subject to a 10 percent withholding payment.
The new property withholding rules are being introduced on the sales of property by foreign residents to ensure that foreign residents pay capital gains tax when they sell their investment properties. Withholding arrangements are commonplace in numerous other countries, including the USA, Canada, France, Spain and Japan, and as foreign investment in Australian real estate has increased, particularly in high rise apartment developments, it’s become necessary to introduce the reforms here too.
If you’re an Australian resident selling taxable property
The property withholding arrangement doesn’t apply to Australian residents selling property with a market value of more than $2 million dollars, as long as you obtain a clearance certificate from the ATO and supply it to the buyer before settlement. This will typically be the responsibility of your conveyancer, but you can also apply and lodge them on the ATO’s website yourself.
If you fail to provide the buyer with a clearance certificate, they will be legally obliged to withhold 10 percent of the purchase price and forward it to the ATO. It’s important to keep that in mind if your home has given buyers a price guide of just under $2 million, and you accept an offer above $2 million, in which case you’ll need to obtain a clearance certificate.
In such an instance, it’s probably worthwhile obtaining one in the event that your property exceeds the $2 million mark. Straightforward applications that are lodged online will be processed and issued with an electronic certificate within a few days; paper applications make take 2-4 weeks to be processed. A clearance certificate is valid for twelve months from the date of issue.
If you’re buying property valued at or above $2 million
If you’re a buyer in the market for property valued at or above $2 million, it’s critical that you understand your obligations with respect to the new property withholding arrangements. Before settlement, the owner of the property must provide you with a clearance certificate, which confirms that the vendor is an Australian resident and therefore exempt from the 10 percent withholding amount.
If you’re not supplied with a clearance certificate before settlement and the purchase price is $2 million or more, you’re then legally obliged to withhold 10 percent of the purchase price from the vendor and forward it to the ATO. If you fail to forward the 10 percent withholding amount to the ATO, a penalty equal to the amount that should have been withheld will be charged, plus interest, which is why it’s so important that you’re aware of these latest reforms.
As the buyer, you will be held penalised — and heavily, at that — for not withholding 10 percent of the purchase, not the vendor. To avoid paying any interest fees, you must also complete a ‘purchaser payment notification’ form on or before settlement day to provide the ATO with details of the vendor, purchaser and the asset being acquired.
If you’re not an Australian resident
If you’re selling a taxable property and you’re not an Australian resident, and the purchase price is $2 million or more, the buyer of your property will be legally obliged to withhold 10 percent of the purchase price and forward it to the ATO. If the purchase price is less than $2 million, however, the withholding amount doesn’t apply.
If you believe the 10 percent withholding amount is inappropriate, you are entitled to apply to the ATO for a variation of the withholding amount, at the ATO’s discretion. If a variation is approved by the ATO, a notice of the variation must be provided to the buyer before settlement, to ensure the reduced withholding rate applies.
Where you’re not entitled to a variation of the withholding rate from the ATO, you are entitled to lodge a tax return and claim a credit for the withholding amount paid to the ATO where the capital gain tax payable on the property is lower than the withholding amount.
If you’re still not sure of your obligations
Whether you’re Australian resident who’s buying or selling property in Australia or a foreign investor selling property in Australia, if you’re still not sure how or if the property withholding rules apply to you, check the ATO’s website or ask your accountant, conveyancer or solicitor to explain your obligations.
Otherwise, to learn more about selling property in Australia, subscribe to receive access to our free guide called, Selling Your Property: What You Really Need to Know. Alternatively, for more property news, insights and analysis, continue reading our blog.
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