Make sure you are clear!
I recently had to assist a client obtain a foreign resident capital gains clearance certificate since they are selling an investment property. This is the first one I have done and its very important you are the purchaser or the vendor. You must ensure a valid certificate is provided as currently all property owners in Australia are considered to be foreign residents and if you don’t comply, withholding tax can be applied by the ATO.
What does this mean for the vendor?
The vendor must ensure this certificate is obtained prior to sale of the property. Even if the vendor is an Australian resident, if no certificate is provided 12.5% of the proceeds will be remitted by the purchaser to the ATO on settlement. This will mean that the vendor who may have no capital gains tax liability will have to negotiate with the ATO for the release of the withholding tax remitted.
What does this mean for the purchaser?
If the purchaser buys a property that is over $750,000 and a valid capital gains clearance certificate is not provided, the purchaser must remit 12.5% of the purchase funds to the ATO on settlement. The remitted funds will be held by the ATO and applied against the any capital gains tax liability arising on the sale of the property by the vendor. If the purchaser fails to remit the funds, the ATO may recover the 12.5% withholding tax on top of the sale price of the property from the purchaser. So effectively the purchaser will have paid 112.5% of the property price. The purchaser would then need to seek legal recourse against the vendor, which may or may not be successful. This could be extremely problematic particularly if the vendor resides in a foreign jurisdiction. The purchaser’s solicitor or conveyencer should complete this check for you, but given the potential magnitude of the liability it may well be worth asking for a copy of the certificate as part of the process. In the case of the client I assisted, the solicitor acting on the sale said it was the accountant’s responsibility since it was tax matter not a legal matter.
How long does it take to get a certificate and how long are they valid?
The certificates usually take between 2-14 days to issue and are generally valid for 12 months.
If you need any assistance with foreign resident capital gains clearance certificates as a purchaser or vendor please contact our office.
This article appeared in our August 2018 newsletter. It was written by Peter Gill.