What is the foreign resident capital gains threshold and withholding rate? What do the recent changes mean?
What is the Foreign Resident Capital Gains Withholding Tax?
As of 1 July 2017, in circumstances 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 are required to obtain a clearance certificate from the ATO prior to settlement to ensure they do not incur the withholding liability.
Foreign resident vendors are required to 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. The vendor may claim a credit for any withholding amount paid to the ATO in their tax return.
Who is a Foreign Tax Resident?
The ATO has not adopted the same definition of a foreign resident as that used for immigration purposes or for the Foreign Investment Review Board. A Foreign Tax resident for the purposes of the withholding tax is any person who does not hold a clearance certificate or vendor declaration.
What is the current threshold and rate and what is changing?
On 9 May 2017, the Government announced proposed changes to the Foreign Resident Capital Gains Withholding (FRCGW) threshold and withholding rate, including:
- An increase in the withholding tax rate from 10% to 12.5% on contracts entered into after 1 July 2017; and
- The threshold for when the withholding tax applies will apply to contracts for the disposal of real property where the contract price is $750,000 or above (previously $2 million).
The changes to the threshold and withholding rate are proposed for contracts entered into on or after 1 July 2017.
What Assets are relevant:
Taxable Australian real property with a market value of $750,000 or more, including:
- Vacant land, any buildings, commercial premises;
- Mining, quarrying or prospecting rights where the material is situated in Australia; and
- Lease premiums paid for the grant of a lease over real property in Australia.
- Indirect Australian real property interest in Australian entities whose majority assets consist of the above asset types; and
- Option or rights to acquire any of the above asset types.
The Clearance Certificate
If the purchase price of the property is above the threshold amount of $750,000, an Australian tax resident purchaser is required to withhold 12.5% from the purchase price unless the vendor provides them with a clearance certificate from the ATO. A clearance certificate confirms that no withholding is required from the transaction and is valid for 12 months.
The purchaser or their legal representative is required to pay this withholding to the ATO on or before the date of settlement.
For all other assets with a market value of $750,000 or more, a clearance certificate is not required, however a purchaser may request from the vendor a declaration of:
- The vendor’s residency; or
- That the membership interest is not an indirect Australian real property interest.
A purchaser is not required to obtain a vendor declaration unless they have reason to believe a vendor is a foreign resident. If a vendor is unable to provide a declaration, a purchaser must withhold 12.5% of the purchase price.
As with real property assets, the purchaser or their legal representative is required to pay this withholding to the ATO on or before the date of settlement.
Where a foreign resident, believes the amount to be withheld is too high, it may be appropriate to apply for a variation on the withholding amount. A successful variation will reduce the amount the purchaser withholds at settlement.
A vendor may apply for a variation in the following situations:
- Selling property at a loss;
- Applying for a Capital Gains Tax roll-over;
- They have a nil or reduced income tax liability; or
- Proceeds at settlement will be insufficient to cover both the amount to be withheld and to discharge the debt the property secures.
If you would like to know more about the foreign resident capital gains threshold and withholding rate please contact one of our experienced staff at Bambrick Legal today.