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Capital Gains Withholding – New Regulations

The first time that foreign resident capital gains withholding applied to vendors who were disposing of specific taxable Australian property under contracts entered into was on 1 July 2016. A final withholding amount of 10% has since been applied to these transactions at the time of settlement.

New regulations for these foreign resident capital gains withholding (FRCGW) apply to vendors who are disposing of certain taxable property under any contracts that are entered into as of 1 July 2017. These changes will apply to genuine property disposals where the contract price is for $750,000 or more (the previous amount was $2 million), and for this, the FRCGW rate of withholding will be 12.5% (10% previously). The current rate and threshold will apply to any contracts entered into between 1 July 2016 up to and including 30 June 2017 – even if the deals are not going to be settled until after 1 July 2017.

Background Information

Any Australian resident vendors who are selling real property will have to ensure that they obtain a valid clearance certificate from the ATO before settlement takes place. This will help ensure that they aren’t hit with the 12.5% non-final withholding amount.

The reason for this current withholding legislation is that it assists with the collection of Australian tax liabilities that are owed by foreign residents. It places a strict obligation on buyers to withhold an amount equal to 12.5% of the property’s purchasing price and in turn pay it over to the ATO, where a vendor has entered into a contract on or after 1 July 2017 and sells specific types of assets (or obtains a lease premium for the grant of a lease over Australian real properties).

It is mandatory for all foreign resident vendors to submit a tax return at the end of each financial year to declare their Australian assessable income. This includes any form of capital gain that has been obtained from the disposal of assets. A valid tax file number (TFN) is needed to submit any tax returns, and vendors who do not have one will be required to apply for a TFN. The vendor will then be allowed to claim a tax credit for any withholding amount that has been paid to the ATO in their tax return.

Australian resident vendors can help avoid the 12.5% withholding by providing any one of these items to the buyers before settlement is completed:

  • For any form of Australian real property, a valid certificate of clearance that has been obtained from the ATO
  • For any other types of assets, a vendor declaration stating that they are not a foreign resident

Any foreign resident vendor is permitted to apply for a variation of the withholding rate or be willing to make a declaration stating that a membership interest is not an indirect Australian real property interest and as a result, not subject to any withholding. Buyers will need to pay the withheld amount at the time of settlement to the Commissioner of Taxation.

If you would like to find out more about how this process works, call us today on 03 9848 5933.