Foreign Resident Capital Gains Withholding (FRCGW) first applied to vendors disposing of certain taxable Australian property under contracts entered into from 1 July 2016. A 10% non-final withholding was applied to these transactions at settlement.
New rules for FRCGW apply to vendors disposing of certain taxable property under contracts entered into from 1 July 2017. The changes will apply to real property disposals where the contract price is $750,000 and above (previously $2 million) and the FRCGW withholding tax rate will be 12.5% (previously 10%).
The existing threshold and rate will apply for any contracts that are entered into from 1 July 2016 and before 1 July 2017, even if they are not due to settle until after 1 July 2017.
These rules apply to both Australian residents and Foreign resident vendors.
Real property covers vacant land, buildings, residential and commercial property.
It is important to note that any type of entity, including super funds, can be affected by an asset withholding obligation.
Australian resident vendors selling real property will need to obtain a clearance certificate from the Australian Taxation Office (ATO) prior to settlement, to ensure they don't incur the 12.5% non-final withholding.
Foreign resident vendors may apply for a variation of the withholding rate or make a declaration that a membership interest is not an indirect Australian real property interest and therefore not subject to withholding.
It is the vendor’s responsibility to obtain the clearance certificate and provide it to the purchaser at or before settlement. To avoid unanticipated delays, and to ensure the certificate is valid at the time it is given to the purchaser, vendors seeking a clearance certificate should apply through the online form as early as practical in the sale process.
The name on the clearance certificate must match the name on the Certificate of Title. The vendor should be the name of the entity that has legal title to the asset. The purchaser doesn't have to accept the clearance certificate if there is a discrepancy.
Without being presented with a valid clearance certificate, the purchaser will be required to remit 12.5% of the purchase price to the ATO if no other exclusions apply by the settlement / asset transfer date.
A purchaser that fails to withhold an amount required to be withheld from the purchase price must pay the ATO a penalty equal to the amount they failed to withhold.
The purchaser will also be subject to the general interest charge on any amounts not paid to the ATO by the required date.
The $750,000 threshold applies to the entire property’s market value, regardless of whether only part of the property is purchased. For example, if an individual acquires a 25% interest in an $800,000 property they are likely to pay only $200,000 (< $750,000) but will still be subject to a potential withholding tax obligation.
If, for example, a number of properties are acquired at once under scenarios such as:
- Two strata title units acquired together;
- Three commercial properties acquired as part of a larger acquisition of a business and its assets;
- On a combined basis, the purchaser’s TARP acquisition may amount to a ≥ $750,000 market value; but
- On an individual asset basis, each strata title unit/commercial property may have a < $750,000 market value.
The $750,000 market value threshold is applied on a per CGT asset basis.
The vendor must lodge an income tax return in order to claim a credit for any asset withholding tax arising a sale. It is very important for Australian residents to obtain an ATO clearance certificate as the cashflow withheld would start at a minimum of $93,750 (12.5% of $750,000).
For more information on the Asset Withholding Tax Changes and how the changes affect you, please contact Ian Walker on 07 3002 2699 or firstname.lastname@example.org.
The information contained in this article is of a general nature and does not take into account personal circumstances. Before making any decisions based on the factual information contained in this document, please consult with your financial adviser.