Foreign resident capital gains withholding

Discussion in 'Accounting & Tax' started by Ran Gus, 17th Apr, 2016.

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  1. Ran Gus

    Ran Gus Well-Known Member

    5th Feb, 2016
    Couldn't find any threads to discuss this change that starts from 1 July 2016.
    Apologies if there is an existing thread.

    The ATO issued summary is available here, but I've tried to summarize my understanding of how it works below. Please feel free to provide feedback if you believe my information is incorrect & I will update.


    - Any property purchased for equal to or over $2 million from 1 July 2016* requires the purchaser to withhold 10% of the purchase price** and instead pay this directly to the ATO.​

    - The only way the purchaser is freed from this obligation is by being provided with a 'clearance certificate' from the vendor. This is obtained from the ATO and states that the vendor is not a foreign resident. This certificate is valid for 12 months, so it can be obtained by the vendor before the property is listed for sale.​

    - The crucial part here is that if the 10% is not paid to the ATO, the purchaser is liable***.​

    Example 1:

    Steve is an Australian resident and owns a property in Sydney. He enters into a contract with Jeff to sell him the property for $5M.

    Jeff must withhold $500,000 at settlement and pay this to the ATO, unless Steve provides him with a clearance certificate.
    Example 2:

    Pablo is a foreign resident who lives in Mexico. He owns a property in Brisbane, and has entered into a contract to sell it to Tim for $3M.

    Tim must withhold $300,000 at settlement and pay this to the ATO, as Pablo will be unable to provide him with a clearance certificate due to being a foreign resident.​

    Potential Issues

    1. Using the facts from Example 1 above, say Steve has no idea about these new rules. He turns up to settlement and Jeff attempts to pay him $4.5M for his property. Steve is upset as he is being 'shortchanged' 10% of the sale price. There is potential here for contracts to be breached and litigation to start.

    2. On the flip side, say Jeff has no idea about these rules. He turns up to settlement and pays Steve $5M.

    Some time later, the ATO contacts Jeff and asks for the $500,000 that was supposed to be withheld from the purchase. This amount was already paid to Steve at settlement, but unfortunately Jeff is liable for the $500,000 as the withholding obligation is on the purchaser NOT the vendor.​

    Why is this being introduced?

    The government is trying to combat foreign residents who sell Australian property and never pay CGT as they don't lodge a return. It's difficult for the ATO to chase people who move overseas and never return to Australia.

    Instead, the ATO will force an amount to be withheld that can only be refunded to the vendor upon lodgement of the their income tax return (and payment of their CGT liability).​

    Will this affect me?

    For the vast majority of people, this likely won't be an issue as:

    a) they aren't buying property for $2M+

    b) their solicitor should be aware of these changes and be requesting a clearance certificate from the vendor (if not already provided) to free them from the obligation

    However, it's probably not a bad idea for as many people as possible to be aware of this, to save yourself any trouble if your solicitor is a dud.​


    These withholding amounts can be varied via an online form if the 10% rate is expected to be too high.​


    What are your thoughts on the legislation? Personally I believe it's a huge obligation to place on purchasers and the ramifications of failing to withhold are extremely severe. However, it's a pretty effective way to make up some of the tax shortfall from foreign residents who don't lodge their tax returns / pay their tax.

    * contract date, not settlement date
    ** actually 10% of the first element of the cost base to stop people selling for less than market value
    *** the penalty for failing to withhold is equal to the amount that should have been withheld
    Skilled_Migrant and Ouga like this.
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Plus Member

    9th Jun, 2006
    Australia wide
    Good summary Ran Gus.

    I think it is good legislation as it will mean more tax is collected from these foreign devils. Before they could just disappear without a trace with no CGT being paid and no hope of recovery.
    $2mil is a good level to start with as it doesn't hurt the average buy of property.

    Not many people would do their own conveyancing at this price level and all lawyers and conveyancers would be aware of it so the chances of some purchaser getting caught out would be very low.
    Ran Gus likes this.
  3. Scott No Mates

    Scott No Mates Well-Known Member

    18th Jun, 2015
    Sydney or NSW or Australia
    It may be good legislation but imho the anecdotal evidence is that there's more foreign buyers at the lower entry level so even a $1m pinch point would be more effective. Yes, there are plenty of sales in Sydney over $2m but not inany other cities.
    Ran Gus likes this.
  4. Ran Gus

    Ran Gus Well-Known Member

    5th Feb, 2016
    I wouldn't be against the legislation being for all property purchases.

    As long as they integrate it properly and make it an accepted part of the standard purchase process (e.g part of Section 32 in Victoria, part of standard contracts everywhere) so everybody is aware of it, I think it could work without being too much of a hassle.
    Terry_w likes this.