Foreign Residents selling property in Australia

As of 7 March 2024, the Australian Taxation Office (ATO) has reiterated the application of a 12.5% foreign residents capital gains withholding (FRCGW) on all property transactions exceeding $750,000 conducted by non-resident individuals. This entails withholding a minimum of $93,750 from the sale proceeds, unless a variation is approved.

Variations

Vendors are eligible to seek a variation under specific conditions:

• Ineligibility for a clearance certificate: This may arise if the vendor is unable to satisfy the criteria for obtaining a clearance certificate, which typically requires Australian residency status.
• Inappropriateness of a vendor’s declaration: A vendor’s declaration may not be suitable or sufficient to justify a lower withholding rate, necessitating a variation request.
• Justification for a lower withholding rate: In cases where 12.5% withholding is deemed excessive relative to the actual Australian tax liability on the asset sale, vendors may apply for a variation to reduce the withholding amount.

Valid reasons for a variation encompass scenarios where the vendor:

• Does not generate a capital gain: This could occur if the vendor anticipates a capital loss from the transaction, invokes a CGT roll-over, or is exempt from capital gains tax (CGT) obligations.
• Lacks an income tax liability: Instances where the vendor possesses carried-forward capital losses or tax losses, resulting in no taxable income, may warrant a variation.
• Faces creditor claims exceeding sale proceeds: If a creditor holds a mortgage or other security interest over the property, and the proceeds from the sale are insufficient to cover both the withholding amount and the debt, a variation may be necessary to mitigate financial implications.
• Undergoes foreclosure proceedings: In cases where a creditor acquires legal title to the property due to foreclosure, compliance with withholding obligations may further diminish the creditor’s security interest, necessitating a variation to address this concern.

Implications of Failure to Provide a Variation

Failure to furnish a variation before settlement mandates purchasers to withhold 12.5% of the purchase price for transactions surpassing $750,000. It’s crucial to note that withholding errors do not arise if the vendor qualifies for a variation but fails to obtain one timely.

Late Variation Applications and Settlement Impact

Delayed submissions of variation requests, observed in over 60% of cases in 2023, impact settlement processes significantly. Conveyancers or solicitors are compelled to withhold 12.5% if foreign residents fail to lodge variations online at least 28 days before settlement. To avoid these challenges, the ATO recommends proactive and timely submission of variation requests to facilitate smooth property transactions.

Tax Reporting Obligations

Vendors must file an income tax return to:

• Claim credit for the withheld amount: Upon filing an income tax return, vendors can claim credit for the amount withheld under the FRCGW provisions, offsetting their tax liability.
• Disclose their capital gain (or loss): Vendors must accurately disclose any capital gains or losses arising from the property transaction in their income tax return, ensuring compliance with tax reporting requirements.

Credit for withheld FRCGW applies to the contract signing year. Delays in lodging returns may occur before vendors can offset withheld amounts, potentially resulting in refunds post-assessment.

Clearance Certificate and Withholding Exemptions

Clearance certificates assure purchasers of exemption from withholding obligations. A vendor’s failure to provide a valid certificate mandates purchasers to withhold 12.5% if transaction values exceed $750,000, unless other exceptions apply.

Vendor Responsibilities and Timely Certificate Procurement

Vendors are responsible for securing and timely presenting clearance certificates to purchasers, avoiding unforeseen delays. Applications should precede contract signings to validate certificates at settlement. Vendors are urged to initiate the certificate procurement process early in the sale process to prevent last-minute complications.

Tax Refunds and Offsets

Refunds of withheld amounts depend on tax liabilities and debts. Calculated refunds may offset other tax debts before disbursal to vendors.

ATO Recommendations and Proactive Measures

The ATO Advocates:

• Inclusion of sales contracts with variation applications: Providing comprehensive documentation enhances the efficiency and accuracy of variation processing.
• Online lodgment of variations at least 28 days before settlement: Timely submission of variation requests is critical to ensure processing within stipulated timelines.
• Clarification that the main residence exemption does not extend to foreign residents: Foreign residents should be aware that the main residence exemption, which applies to Australian tax residents, does not apply to them.
• Requirement for Australian resident vendors to furnish clearance certificates before settlement: To affirm their tax residency status and exempt purchasers from withholding obligations, Australian resident vendors must obtain and provide valid clearance certificates before settlement.

Feel free to reach out to a member of the MaxGrowth team on 02 9267 4468 or [email protected]

Disclaimer: The following article provides general information and should not be considered as professional financial or legal advice. For specific advice regarding your business, consult with a qualified professional.