Property 101: The capital gains withholding payments rules

Monday 18 Jul 2016

From 1 July 2016 Australian residents selling real estate with a market value of $2 million or more will need to apply for a clearance certificate from the Australian Taxation Office (ATO) to ensure amounts are not withheld from the sale proceeds.

Where a valid clearance certificate is not provided by settlement, the purchaser is required to withhold 10% of the purchase price and pay this to the ATO.

BACKGROUND

In May 2013 the government announced that it would introduce a 10 percent non-final withholding tax on payments made to foreign residents who dispose of certain taxable Australian property with a market value above a specified threshold. The new legislation for this measure became law in February 2016.

The types of taxable Australian property this applies to include vacant land, buildings, residential and commercial property, leaseholds and strata title schemes.

WHAT THIS MEANS FOR PURCHASERS

Where a foreign resident disposes of Australian real property with a market value of $2 million or above, the purchaser will be required to withhold 10 percent of the purchase price* and pay it to the Australian Taxation Office (ATO) unless the seller provides you with a variation. Australian residents will need to provide a clearance certificate otherwise a withhold of 10 percent of the purchase price will apply.

WHAT THIS MEANS FOR SELLERS

Australian resident vendors who dispose of Australian real property with a market value of $2 million or above will need to apply for a clearance certificate from the ATO to ensure amounts are not withheld from their sale proceeds.

All transactions involving real property with a market value of $2 million or above will need the vendor and purchaser to consider if a clearance certificate is required.

If a purchase price negotiated between a purchaser and vendor is on an ‘arm’s length basis’, then the purchase price may be used as a proxy for market value.

* Note: The legislation specifies that the 10% withholding is on the ‘first element of the cost base’. However, as purchase price is understood by vendors and purchasers, and in many instances will be equal to the ‘first element of the cost base’, we have used the term purchase price for simplicity.

WHEN WILL THIS APPLY?

The new withholding regime will apply to contracts entered into on or after 1 July 2016 for the sale of property with a market value of $2 million or above.

WHAT IF THERE ARE MULTIPLE PURCHASERS?

The market value of all purchasers’ interests in the transaction must be aggregated in examining whether the $2 million market value threshold has been reached. If the aggregated purchase price is $2 million or above, each purchaser must withhold in proportion to their percentage of the total purchase price. 

 

http://www.propertyobserver.com.au/forward-planning/advice-and-hot-topics/55743-property-101-the-capital-gains-withholding-payments-rules.html

- Property Observer