Since 1 July 2016, if an Australian property was sold for $2M or more, the purchaser was required to withhold 10% of the purchase price and remit this amount to the ATO, unless the seller had provided a valid clearance certificate prior to settlement.
From 1 July 2017 (date of contract not settlement), the withholding rate will be increased to 12.5% and the present threshold of $2M will be lowered to $750K.
Implications if you are the purchaser
If you do not receive a validly completed clearance certificate, you are required to withhold 12.5% of the purchase price at settlement and remit it to the ATO with the remaining 87.5% paid to the seller.
The $750K threshold is GST exclusive if you can claim an input tax credit, otherwise it’s inclusive of GST.
If you fail to withhold the correct amount, you will be required to pay the amount owed to the ATO with interest. Your legal adviser will be able to provide you with guidance on the required amount to ensure you don’t end up paying the purchase price plus an additional 12.5%.
Implications if you are the seller
The intention of the rules is to ensure that foreign resident sellers comply with their tax obligations upon the realisation of Australian assets. This means that if you’re an Australian resident, in order for you to receive the full proceeds from sale, your lawyer will need to request a clearance certificate from the ATO and provide it to the purchaser prior to settlement. The clearance certificate is a statement by the ATO that you are not a foreign resident.
Foreign resident sellers will have additional obligations that they will need to comply with.
Seeking legal advice will ensure that you meet all your tax obligations and receive your maximum entitlement at settlement.
What other arrangements do the rules apply to?
The rules are complex and can also apply to:
- Interests in a company or trust that owns land (these rules place a greater onus on the purchaser, ensure you seek legal advice!)
- Matrimonial settlements
- In-specie trust distributions
- Transfers as a result of death or pursuant to a Will
- Property sold on revenue account or as trading stock — e.g. property developers
- Options to acquire Australian real property and indirect Australian property interests
- Certain leases over Australian real property
For assets other than Australian real property, seller declarations are required instead of clearance certificates.
Talk to your DPM Consultant if you have any questions or would like further information. They will be able to put you in touch with Fletcher Clarendon should you require legal advice.
*DPM communications are intended to provide commentary and general information. They should not be relied on as legal or financial advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication.