A refresher on foreign resident capital gains withholding for real estate agents - REIQ %

In 2017, the Federal government enacted withholding tax rules that enabled the government to withhold a tax on certain property sales where the market value of the property is $750,000 and above.

While the laws are aimed at the collection of foreign residents' Australian tax liabilities, all sellers of properties with a market value of $750,000 or more are affected by these laws.

With the recent increase in sale prices across Queensland's property market, it is prudent for all real estate agents to be aware of how this law affect sellers and the property settlement process.

The Law

Pursuant to the relevant legislation[1], the Australian Taxation Office (ATO) is able to withhold 12.5% of the purchase price of taxable Australian real property, or an indirect Australian real property interest[2] sold by foreign residents with a market value of $750,000 or more.

Practically, this withholding occurs at settlement when the buyer of the property has an obligation to pay 12.5% of the purchase price directly to the ATO.

It should be noted that if one seller is a foreign resident, but others are not, withholding will still apply.

Following settlement, a seller can apply for a tax credit from the ATO in relation to the amount withheld for the capital gains liability arising from the transaction.

However, as the legislation is aimed at foreign residents, withholding tax should not apply to the sale of property by Australian residents (where the seller obtains an ATO Clearance Certificate).

An Australian resident seller can apply to the ATO for a Clearance Certificate to provide to a buyer on or before settlement in order to avoid the withholding of capital gains.

This means that Australian residents who are selling a property with a market value of $750,000 or more will need to apply for a Clearance Certificate from the ATO to ensure that a portion of the proceeds of sale are not paid to the ATO by default. It is important to note that unless the seller provides the buyer will an ATO Clearance Certificate, the buyer is obliged to pay the ATO with 12.5% of the purchase price at settlement (if no other exclusions apply).

The onus is therefore on a resident seller to obtain an ATO Clearance Certificate and to provide it to the buyer in order for the buyer to prepare the appropriate cheques or funds for financial settlement via PEXA for settlement of the property transaction.

Australian resident clearance

Whether or not the seller is a corporate entity or an individual, the ATO will only issue a Clearance Certificate to a seller who is not a 'foreign resident' for taxation purposes.

The ATO will consider whether a person is a foreign resident based on the ordinary meaning of the word 'resides'[3]. The classification of whether a person or corporation resides in Australia is therefore not a clear-cut test and must be assessed by the ATO on the facts of each situation.

In circumstances where it is unclear whether a seller is, or is not a foreign resident, a prudent real estate agent should direct a seller to the ATO and/or their solicitor to determine this issue.

To obtain an ATO Clearance Certificate, a resident seller will need to complete a simple online application form themselves on the ATO's website. If they are unable to do so, a seller may engage their solicitor or tax agent to complete the form on their behalf.

Where there are multiple sellers of a property, an ATO Clearance Certificate must be obtained for each seller.

It is important to note that even if a seller no longer lodges tax returns, such as an aged pensioner, they are still required to obtain an ATO Clearance Certificate.

The ATO's process of obtaining a Clearance Certificate can take up to 28 days and, in more complicated cases, may take longer than this period. Once obtained, a Clearance Certificate is valid for a period of 12 months from the date of issue.

An agent should not complete an application for a Clearance Certificate on behalf of a seller as the application acts as a declaration to the ATO - such declaration should be affirmed by the seller personally, or by their solicitor or tax agent on the seller's instructions.

Once an ATO Clearance Certificate is obtained by a seller, it is best to request a copy of the certificate (which is issued in PDF format) for the sales file in case of any issues at settlement.

Best practice tips

In order to allow for a smooth and efficient property sale, real estate agents should ensure that sellers are aware of the withholding tax regime prior to listing a property for sale.

In circumstances where it may be unclear whether the property is likely to sell for $750,000 or more, such as sales by auction, or expression of interest, agents should alert sellers to the potential that withholding tax may apply if they do not obtain a Clearance Certificate prior to settlement.

In circumstances where obtaining a Clearance Certificate is expected to be a lengthy process, it would be advisable for a seller to make an application to the ATO at the earliest opportunity to reduce the likelihood of delay in receiving a Clearance Certificate or withholding applying at settlement.

Whilst it is crucial to advise sellers of the withholding tax regime, real estate agents should take care not to provide legal or financial advice to their clients.

In circumstances where it may be unclear whether withholding tax will apply, or where a seller may be confused as to the regime, real estate agents should advise a seller to seek independent legal advice, or to contact the ATO.

References:

[1] Treasury Laws Amendment (Foreign Resident Capital Gains Withholding Payments) Act 2017 (Cth).

[2] In an Australian entity with a majority of assets consisting of taxable Australian real property.

[3] Taxation Ruling TR 98/17

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