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Are you looking to purchase property in Australia?

The Australian Taxation Office has issued changes to capital gains withholding requirements on real property and other assets owned by foreign investors.

The Purchaser’s Responsibility

As the purchaser, you have a responsibility to ensure you withhold the appropriate funds from a foreign vendor and submit them to the ATO.

The changes to withholding requirements apply to contracts dated on or after the 1st of July 2017 in relation to any real property with the agreed market value of $750K or above. Previously, this minimum was set at $2 million so these changes will affect a greater proportion of property investors and home buyers.

The ATO will now require that purchasers keep 12.5% of the market value of the property as foreign resident capital gains withholding (FRCGW) and pay it to the Australian Taxation Office.

This rule applies unless the vendor provides a clearance certificate from the ATO to prove their exemption or a declaration of residency in Australia. A clearance certificate will confirm that the property or assets in question are owned by an Australian resident, and therefore not subject to foreign investor taxation requirements.

5 points for purchasers to consider when buying real property

  1. What is the market value of the property? This market value can also be the agreed value as negotiated by the vendor and purchaser. This value needs to be under $750K to be exempt from the capital gains withholding requirements. Properties valued at and above $750K will therefore be subject to withholding laws.
  2. It is the responsibility of the purchaser to ascertain whether a property or asset is owned by a foreign investor. When you write your contract, ensure you have a clause requiring that the vendor provides relevant evidence.

  3. This evidence comes in the form of a clearance certificate or a residency declaration, provided by the vendor to the purchaser at settlement.  A clearance certificate is a standardised certificate provided by the ATO to the vendor. If a vendor provides a declaration to the purchaser that they are an Australian resident then they will not be a relevant foreign resident (unless the purchaser knows it’s false). If you receive this clearance certificate or declaration you won’t be required to withhold any capital gains and the contract can be executed as normal.
  4. Should the vendor not provide the appropriate clearance certificate or decleration, you will need to withhold the capital gains: 12.5% of the market value subsequently paid to the ATO.

  5. In an instance where the property market value has the potential to drop underneath the threshold (after the paying of disbursements, levies, etc) it’s in the purchaser’s best interests to obtain a clearance certificate anyway. Should the market value be under the threshold then there’ll be no need to use it at settlement. However, it’s better to be safe than sorry if the market value is quite close to the mark.

The Knowledge Condition

Another consideration is what the ATO refer to as the Knowledge Condition. This can stand in place of any official declaration if you know certainly one way or the other if the vendor is a foreign or Australian resident. If you have reasonable grounds to believe the vendor is an Australian resident, then withholding won’t be required.

A simple example of this circumstance: if you are purchasing assets from a friend, whom you know for sure lives locally, you would not be required to withhold and wouldn’t run the risk of having to pay the 12.5% capital gains later. Alternatively, you may know of this friend’s foreign address, and therefore can withhold without asking for confirmation.

Conisder very carefully whether the the knowledge condition aplis to you. If you’re not comfortable applying the Knowledge Condition ask for a clearance certificate or a vendor residency declaration. It would not be wise to assume Australian residency and find out later you were wrong!

If you need help to determine which circumstances apply to your purchase or manage your FRCGW responsibilities, your finance broker should be able to put you in contact with the appropriate legal and tax advisors.