Over the last few years, Australia has introduced foreign resident capital gains withholding, which requires non-resident property owners to withhold tax on the sale of their property and pay it to the ATO. If an Australian resident for tax purposes sells their property, they may need a certificate to show this extra tax doesn’t apply. In this article, we cover:
What is capital gains withholding tax?
Capital gains withholding tax was originally introduced by the Australian Government in 2016, but it underwent some significant changes a year later, starting from July 2017. As of that date, any person who purchases Australian property from a non-resident is required to withhold 12.5% of the purchase price and remit it to the ATO.
When the tax rule was first introduced, it only affected properties with a value of $2 million or higher, and the rate was lower at 10%. However, since 1 July, 2017, anyone buying property to the value of $750,000 or higher from a foreign resident must withhold 12.5%, unless the seller can provide them with a withholding clearance certificate.
What is a foreign resident capital gains withholding clearance certificate?
A foreign resident capital gains withholding clearance certificate is a document issued by the ATO which can be used by Australian residents selling their property to notify the buyer and the ATO that foreign resident capital gains withholding tax does not need to be withheld from the sale of their taxable property.
A clearance certificate guarantees property purchasers that they will not have to withhold tax from the property transaction.
Unless the buyer receives one of these capital gains withholding clearance certificates, the default position is that they have to withhold 12.5% withholding tax and pay it to the ATO on the seller’s behalf.
So, the seller’s (or vendor’s) responsibility is to apply for the clearance certificate and provide it to the purchaser at or before settlement. It is also generally in their best interests to do this, to avoid losing 12.5% of their property sale price in tax to the ATO.
You can apply for a clearance certificate via the ATO’s website, or you can have your tax agent apply on your behalf. Once the application has been submitted, you should generally receive your certificate within 28 days.
However, the ATO processes these applications on a first-come, first-served basis. So, you should ensure to submit your application with enough time before your settlement date to avoid being disadvantaged. The ATO recommends doing so “as early as practical in the sale process”.
A clearance certificate is valid for 12 months and can be used for multiple property sales. Once it has expired, you’ll have to apply for a new one.
These clearance certificates are only available to Australian residents and cannot be accessed by foreign residents. In other words, purchasers of property from foreign residents will have to withhold 12.5% tax from the property’s purchase price and pay it to the ATO instead.
If you are a vendor and not entitled to a clearance certificate, but a vendor declaration isn’t appropriate or withholding 12.5% is too high compared to your actual tax liability on the sale of the asset, you can apply for a variation. A vendor declaration is a document that the vendor (or seller) will hand over to the purchaser and it specifies that withholding is not required on the acquisition of the property.
Reasons for a variation
As a vendor, you can apply to the ATO for a variation if:
- you won’t make a capital gain on the transaction
- you won’t have an income tax liability at the end of the year
- a creditor of yours (such as a bank) has a mortgage or security interest on the property, and the profit from the sale isn’t enough to cover both the amount to be withheld and the debt the property is secured against
- a creditor acquires the legal title to your property (meaning, they become the purchaser) due to foreclosure.
More information about these circumstances can be found on the ATO website.
Who is a foreign resident for tax purposes?
According to the ATO, you won’t be considered an Australian resident for tax purposes if you don’t satisfy the residency tests.
There are four tests used to establish whether or not you’re an Australian resident for tax purposes. If you fail any of these tests that apply to you, you’ll generally be considered a foreign resident for tax purposes.
The residency tests
At the time of writing, the four residency tests that the ATO may use are:
- the resides test
- the domicile test
- the 183-day test (only applies to people arriving in Australia), and
- the Commonwealth superannuation test (only applies to certain Australian Government employees working overseas).
In terms of these tests, it’s important to understand all of the criteria and eligibility that may apply to you. It’s recommended you consult the ATO website or your tax agent for the latest information.
If you aren’t able to satisfy any of these tests, then you’ll most likely be a foreign resident for tax purposes, meaning you probably won’t be able to claim a capital gains withholding certificate.
Capital gains withholding clearance certificate tips for foreign residents
The first step is to recognise whether the person you’re buying your property from is a foreign resident for tax purposes.
If they’re not, but they are a property investor rather than an owner-occupier, then you should request their capital gains withholding clearance certificate. This should allow them more than enough time to arrange their clearance certificate before the settlement day.
If, however, you’re buying a property from a foreign resident, it’s generally a good idea to consult a tax agent, because the liability for withholding and the responsibility for payment of the withheld amount falls on you as the purchaser.
Regardless, a tax agent can play an important role in ensuring that you comply with the foreign resident capital gains withholding rules, whether you’re the seller or the purchaser of a property where capital gains withholding could apply.
If you’re an Australian citizen or resident looking to sell an investment property, you must apply for a foreign resident capital gains withholding clearance certificate. This will inform the person buying the property from you not to withhold tax from the property’s purchase price. If you don’t do this, the purchaser will be responsible for withholding 12.5% of the purchase price and paying it to the ATO, meaning you’ll miss out on it.
According to the withholding rules, foreign residents cannot obtain this certificate. So if you’re purchasing property from a foreign resident, you’ll need to ensure that you comply with your tax withholding obligations.
To discuss any matter relating to capital gains tax, tax withholding or residency for tax purposes, it could be important to seek advice from a suitably qualified professional, such as a tax agent.