The Government’s move to tighten the foreign investor tax regime will have an impact on all property sales, a tax expert has warned.
Changes to the foreign resident capital gains withholding threshold, announced in the Budget, apply to all sales of taxable Australian real property, including vacant land, residential and commercial property, as well as mining rights.
The changes apply to contracts entered into on or after July 1.
If the market value of the property is more than $750,000, Australian resident vendors will need to provide a clearance certificate issued by the Australian Taxation Office to the purchaser on settlement, to avoid the purchaser withholding 12.5 per cent of the purchase price and remitting it to the ATO.
Foreign resident vendors cannot provide a clearance certificate to the purchaser and are liable for the withholding tax. Purchasers must pay the amount withheld at settlement to the ATO.
Foreign resident vendors can reduce or eliminate the withholding tax if they can make a case to the ATO. They would have to show that they will make a loss on the sale, that a capital gains tax rollover applies to the transaction, they have carried-forward losses or they are selling their main residence.
Anthony Cordato, the principal of Cordato Partners, says Australian tax residents selling property should apply for a clearance certificate when they enter into a contract for sale.
“Contracts for sale should include a condition which sets out a procedure for the withholding payments, covering clearance certificates, variation notices and remittances,” Cordato says.
“This provides important protection for the purchaser because they are liable to withhold and remit the 12.5 per cent of the price unless the receive a clearance certificate or variation notice.”
Cordato says expatriates who have allowed their Australian tax residency may be able to restore it before they sell a property.
“If you reside in Australia you are considered an Australian resident for tax purposes. There are some secondary residency tests: your permanent home is in Australia; you are present in Australia for more than half the income year; you are an Australian government employee working at an Australian post overseas.”