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 to ensure that 10% is not withheld from the sale proceeds. Australian resident vendors selling or transferring real property will need to obtain a clearance certificate from the ATO prior to settlement, stating that the vendor is an Australian resident to ensure they don't incur the 10% withholding. Importantly these rules also apply when property is transferred from a deceased to an executor and also from an executor to the beneficiary of a deceased estate.
The trustees of self-managed superfunds (along with other entities) will also need to comply with these provisions when selling a property or transferring one to a member upon death. Additionally these rules apply to a transfer from the estate to the beneficiary.
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 and a credit may be claimed for the amount paid to the ATO in the vendor’s tax return for the relevant financial year.
The types of taxable Australian property this applies to include vacant land, buildings, residential and commercial property, leaseholds and strata title schemes as well as “other assets.*
Does this apply to my home?
Only taxable Australian real property with a market value of less than $2 million may be excluded which ensures the vast majority of residential house sales will be unaffected by this measure.*
What this means for purchasers
Where a foreign resident (or Australian resident without a clearance certificate) disposes of Australian real property with a market value of $2 million or above, the purchaser will be required to withhold 10% of the purchase price and pay it to the ATO. Foreign residents will not be able to obtain a clearance certificate but may obtain a tax variation reducing the amount to be withheld below 10%. Australian residents must provide the purchaser with a clearance certificate otherwise the purchaser must withhold 10% of the purchase price.
What this means for sellers
Australian resident vendors who dispose of any Australian real estate 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. If an Australian tax resident vendor had withholding taken from their sale proceeds (for example, because they didn't provide the purchaser with a clearance certificate), they will be able to claim a credit for that amount when they lodge their tax return. This credit may be refunded if they don't have to pay capital gains tax on the sale of the property (for example, because it was their main residence).
What this means for foreign resident vendors
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 estate property interest and therefore not subject to withholding where the property is held by another legal entity).
When will this apply?
The new withholding regime will apply to contracts entered into on or after 1 July 2016 for the sale or transfer 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 and if the aggregated purchase price is $2 million or above, each purchaser must withhold in proportion to their percentage of the total purchase price.
What if there are multiple vendors?
If there are multiple vendors disposing of the property, it is the total market value of the property that determines whether withholding is required by the purchaser. If the purchaser has not been provided with a clearance certificate or a notice of variation from any of the vendors, the purchaser must withhold 10% of the purchase price.
Clearance certificates can be obtained via your accountant and are valid for 12 months, and can be used for the sale of multiple properties while valid. All parties on the Certificate of Title will require a Clearance Certificate. For example, joint tenants / tenants in common will need to fill out two forms.
A clearance certificate may be issued within days of the application being submitted in simple cases, otherwise they will be provided within 14–28 days, with higher risk and unusual cases taking longer. We expect that the ATO will initially be inundated with applications and may not be able to issue the certificate in a timely manner so we recommend that you contact us early to ensure the certificate is received well before settlement. As these rules relate to deceased estates, these applications may take longer to process.
Where the vendor is not entitled to a clearance certificate, but believes a withholding of 10% is inappropriate, we can apply to the ATO for a variation. In the majority of cases (where the ATO has all the required information and the application is successful), the notice of variation will be provided within 28 days. The notice of variation should be shown to the purchaser before settlement to ensure the reduced withholding rate applies. At this stage we do not know if the ATO will be able to meet the 28 day deadline so we recommend that you contact us early to ensure the variation is received before settlement.
Does the withholding need to be provided prior to settlement?
No. The withholding does not need to be provided until settlement, and it is provided by the purchaser out of the purchase price, not in addition to the purchase price.
Is the transfer of ownership affected?
These rules do not prevent settlement taking place but a vendor without a valid clearance certificate may want to postpone settlement to avoid the 10% withholding tax. In situations where property is being transferred to beneficiaries as a result of the death of the property owner the beneficiary will need to find the money to pay the Tax Office if the paperwork is not in order.
Steve Wildes, Partner, Paris Financial
*other assets include;
– indirect Australian real property interests in Australian entities, whose majority of assets consist of the above asset types
– options or rights to acquire any of the above asset types.