Could recent changes to the Foreign Resident Capital Gains Withholding Tax impact you as an investor?

In case you missed the news, the Taxation Administration Act 1953 (Cth) was amended on 1 July 2017 in relation to the foreign resident capital gains withholding (FRCGW) rate and threshold.

The FRCGW tax rate was increased from, 10% to 12.5% and will now apply to all real property disposals with contract prices equal to or above $750,000 (was previously $2 million). While this may sound unremarkable, the impact is potentially severe.

All sellers without an Australian Taxation Office (ATO) clearance certificate are deemed to be foreign residents even if they are not. So special care must be taken now that the ambit of the legislation has drastically broadened.

What is the purpose of the FRCGW tax?

The FRCGW tax was designed to retain a percentage of the proceeds from a sale of assets by foreign residents to ensure they paid their Australian tax obligations. It can be costly to recover taxes from foreign residents after they depart Australia, so the FRCGW tax regime ensures the ATO has access to some of their taxes to mitigate this risk.

Who will the amendments to the FRCGW tax affect?

The amendments to the FRCGW tax will affect all sellers and purchasers who enter into contracts after 1 July 2017 for taxable Australian real property with a market value of $750,000 or more regardless of whether they are foreign residents. Such property includes vacant land, buildings, residential and commercial property, leases over real property and mining, quarrying or prospecting rights where the material is situated in Australia.

What must sellers and purchasers do in relation to the FRCGW tax?

In accordance with the changes, sellers will need to ensure they arrange to obtain a clearance certificate from the ATO that will remain valid for 12 months from the date of issue. Generally, clearance certificates, especially for Australian residents, are issued within a couple of days, but it can take the ATO approximately 14 to 28 days of receiving the application to issue them.

If the seller is a foreign resident, then 12.5% of the purchase price must be withheld and paid to the ATO by the purchaser unless a variation has been applied for and granted by the ATO. If the seller does not supply a clearance certificate or declaration before settlement, then 12.5% of the purchase prices should be withheld by the purchaser until one is issued.

Accordingly, it is critical for the seller to arrange the requisite clearance well in advance as the impact of the 12.5% retention of the purchase price could have severe consequences, particularly if the seller is relying on the funds for the release of the mortgage.

What is a variation?

A seller may apply for a variation if they are not entitled to a clearance certificate, a declaration is not appropriate, and 12.5% withholding tax is too high compared to the Australian tax liability on the sale of the asset. The reasons for the variation may include:

  • The seller will not make a capital gain on the transaction, for example, because they will make a capital loss or a capital gains tax roll-over applies;
  • The seller will not have an income tax liability, for example, because of carried-forward capital losses or tax losses;
  • A creditor of the seller has a mortgage or other security interest in the property, and the proceeds of sale available at settlement are insufficient to cover both the amount to be withheld and to discharge the debt the property secures; or
  • A creditor acquires legal title to the property (that is, they become the purchaser) as a result of an order for foreclosure and its security would be further diminished as a result of having to comply with the withholding obligation.

The variation, if accepted, may reduce the withholding rate from anywhere between nil to 12.49%.

What if the purchaser doesn’t withhold?

If a purchaser fails to withhold when they should, the ATO Commissioner may impose a penalty equal to the amount that was required to be withheld and paid. The purchaser should also expect general interest charges to be applied.

Paying the withholding

To pay the withholding, the purchaser must complete an online FRCGW purchaser payment notification form with the ATO to receive a payment reference number (PRN) and a PDF icon for a payment slip and barcode. This should be done before settlement as the withholding is to be paid on or before the day the purchaser becomes the new owner of the asset, and the PRN and payment slip and barcode are required to make the payment.

Payment may be made by electronic funds transfer or BPAY, in person at Australia Post or by mailing a cheque to the ATO. After payment has been made, a payment confirmation email or letter will be sent to all purchasers and sellers involved in the sale of the asset.

Does the seller still need to lodge an income tax return?

The foreign resident seller must lodge a tax return at the end of the financial year declaring their Australian assessable income, which also needs to include any capital gain from the disposal of the asset. The seller will claim a credit for any withholding amount on their tax return.

A foreign resident seller disposing of Australian property to which these withholding tax rules apply should apply for a tax file number before they lodge their Australian tax return to make sure they can claim a credit for the amount that was withheld and paid to the ATO by the purchaser.

In specific circumstances, an early income tax return may be submitted. If a foreign resident vendor is not eligible to submit an early tax return, they need to wait until the end of the financial year to submit their income tax return and receive a tax credit for the withholding that was paid by the purchaser.

If an Australian tax resident seller had withholding taken from their sale proceeds, for example, because they did not provide the purchaser with a clearance certificate, they would be able to claim a credit for that amount when they lodge their tax return. This credit may be refunded in the relevant tax return if they don’t have to pay capital gains tax on the sale of the property, for example, because it was their main residence.

If you have any questions or would like to discuss your requirements in relation to the FRCGW tax, please contact our office on (07) 3876 5111 for a consultation.

Written by

Kayleigh Whittaker, Lawyer
NB Lawyers – the Lawyers for Employers
[email protected]
07 3876 5111