Property Law Update – Foreign Residents Capital Tax Withholding

If you are selling property valued in excess of $2 million in Australia, the Tax and Superannuation Laws Amendment (2015 Measures No. 6) Act 2015 makes provision for a 10% withholding tax on payments made to foreign residents that dispose of real property with the aim of protecting the integrity of the Foreign Resident Capital Gains Tax (CGT) Regime.

The foreign residents capital tax withholding regime applies to contracts entered into after 1 July 2016. It operates to require purchasers who enter into a contract with foreign residents to withhold 10% of the market value of the property (which most commonly is the purchase price) and pay that amount to the Australian Tax Office (ATO).

What Transactions Does the Tax Withholding Regime Apply To?

The tax withholding regime applies to the following taxable Australian property transactions:

  • Real property in Australia including land, buildings, residential and commercial property;
  • Lease premiums paid for the grant of a lease over real property in Australia;
  • Mining, quarrying or prospecting rights;
  • Interests in Australian entities whose majority assets consist of the above such property or interests (this is called an indirect interest);
  • Options or rights to acquire the above property or interests.

What Transactions are Excluded from the Tax Witholding Regime?

  • Real property transactions where the vendor provides evidence that foreign residency does not apply to them – this involves producing a Clearance Certificate.
  • Transactions listed on an approved stock exchange; and
  • Transactions where the foreign resident vendor is under external administration or bankrupt.

Requirement for Clearance Certificate for Vendors disposing of Australian Real Property:

The tax withholding regime will apply to the abovementioned transactions that are $2 million or more unless the vendor obtains a clearance certificate from the ATO and supplies this to the purchaser. The certificate can be provided to the purchaser before or on settlement, and when provided, the purchaser does not have to withhold the 10% from the purchase price.

The vendor can apply for a clearance certificate at any stage of the sale transaction. The certificate is valid for 12 months and can be obtained through completing an automated ‘Clearance certificate application for Australian residents” Form available from the ATO. In straightforward cases this certificate should be issued within days of its submission, however, in cases of data irregularities or exceptions the process could take between 14-28 days. It is a good idea for vendors seeking a Clearance Certificate to apply as early as possible in the process of selling their property.

Toby Carter



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