The change

All builders and developers (vendors) need to be aware of the new Australian Tax Office rules regarding withholding tax when disposing of property under contracts entered into after 1 July 2016.

This withholding tax applies to a variety of property transactions including vacant land, buildings, (residential and commercial), mining, quarrying or prospecting rights or a lease over real property in Australia.

This new withholding tax was introduced to assist the collection of foreign residents’ Australian tax liabilities, for all properties sold for over $2 million. This legislation imposes an obligation on purchasers to withhold 10 per cent of the sale price, which in turn is payable to the ATO at settlement.

But Australian vendors, builders or developers need to be aware that the 10 per cent withholding is only meant to be claimed against foreign resident vendors – which, historically, have been difficult to recover from after the funds from a sale of property have gone off shore.

Clearance certificate

If you are an Australian resident taxpayer, you will be exempt from having the 10 per cent tax withheld against you for asset sales over $2 million, only in circumstances where you (or your representative) have obtained a valid clearance certificate.

Where a valid clearance certificate is provided, the purchaser is not required (or permitted) to withhold the tax from the purchase price. But if the vendor fails to provide the clearance certificate by the settlement date, the purchaser is required at law to withhold 10 per cent tax from the purchase price.

Solicitors, tax agents or other representatives of the vendor can apply for a clearance certificate on their behalf. Note special procedures apply conveyancers acting for vendors. Applications can be made online for a “Foreign resident capital gains withholding” clearance certificate at www.ato.gov.au/FRCGW.

Importantly, a clearance certificate applies only to the entity specified on the certificate, but if an asset has multiple vendors, each vendor will need to supply the purchaser with a clearance certificate to ensure amounts are not withheld, irrespective if their individual share holding is less than $2 million. Crucially though, clearance certificates are only valid for 12 months, but can be used for multiple disposals of real property that occur within the 12-month period.

What to do next?

If you are contemplating a sale of an asset, where the sale price is expected to exceed $2 million or more, make sure your solicitor or conveyancer is aware of this change and obtains a clearance certificate before the settlement date to avoid 10 per cent of the sale price being withheld and sent to the ATO.

If you would like any more information contact the legal department on (03) 9411 4555.