As you prepare to sell your property, you have probably given little thought to the Foreign Resident Capital Gains Withholding regime. However, it would be worth your while to consider this issue early on in the process of marketing your property.
The Federal government introduced laws in 2016 (amended in 2017) in an effort to crack down on foreign residents selling Australian real estate and then “disappearing” overseas without remitting tax to the ATO.
The method the government adopted to ensure compliance was to place the onus on the purchaser to “withhold” 12.5% of the purchase price on settlement (and remit it to the ATO) unless the seller can produce a Foreign Resident Capital Gains Withholding Clearance Certificate.
You may be surprised to learn that the laws apply to all Australian residential property sold for $750,000 or more.
In order to avoid the purchaser of your property withholding 12.5% of the purchase price on settlement, you will need to obtain a Clearance Certificate from the ATO.
As a result of the introduction of these laws, the provision of Clearance Certificates has become a standard part of the residential conveyancing process. Although, in practice, the ATO issues the Certificates quite quickly, the disclaimer on its website states that the Certificates can take up to 28 days to be issued.
Accordingly, in order to avoid delays to your settlement, it would be preferable to apply for a Certificate when your property is first placed on the market rather than after exchange of contracts. A Clearance Certificate, once issued, is valid for 12 months.
Obviously you do not want to hold up settlement waiting for a Clearance Certificate to be issued. In the worst case scenario, the lack of a Certificate could lead to the purchaser withholding part of the purchase price. The impact of the withholding could be dramatic. For example, there may, as a result, be insufficient funds left over to pay out your mortgage which, in turn, could result in the whole sale “falling over”.
If your property is likely to sell for over $750,000, your lawyer or conveyancer should discuss Foreign Resident Capital Gains Withholding Clearance Certificates with you when you first instruct them to prepare a contract for the sale of your property. Of course, if you are a foreign resident or have complex tax affairs, you should obtain specialist advice from a lawyer and an accountant when preparing to sell your property.