Did you know that if you sell a property worth $2m or more after 30 June 2016 you could be facing a nasty surprise at the time of settlement?
What is a Clearance certificate?
Since 30 June 2016 a foreign resident capital gains withholding clearance certificate is now required to be provided by all vendors (seller) to the purchaser (buyer) prior to settlement. The purpose of the certificate is twofold. The main purpose is to capture tax from non-residents who sell Australian property and never return to Australia or lodge an Australian Tax Return to declare the capital gain and pay their fair share of tax. The second purpose is to advise the Australian Taxation Office (ATO) that you are selling a property and they should expect some details of the sale to be included in your next tax return.
So what is the consequence of not providing a withholding clearance certificate? The purchaser is required to withhold 10% of the sale consideration and instead of transferring the funds to the vendor they are required to send it directly to the ATO. This could have significant ramifications for the vendor especially if the funds are required to payout an existing loan or for settlement on another property purchase. The purchaser also could face significant consequences if they fail to withhold the 10% when they should have, they are likely to be liable for the 10% withholding themselves.
The government is hoping these new withholding rules will encourage non-residents to lodge tax returns in Australia, especially if the capital gains tax liability is less than the 10% withholding. They would be entitled to claim a tax refund in this circumstance. If the tax liability is more than 10% the non-resident will likely be happy to part with the 10% and not lodge the tax return. Vendors can also apply for a variation to the 10 per cent withholding rate in certain circumstances, such as if they can show they will not make a capital gain on disposal or there are carried forward losses to negate any tax liability. We would expect any variation to the standard application would significantly delay the issuing of the clearance certificate and may delay settlement. The ATO promises a turnaround of “a few days” for clearance certificate applications applied for online or 2-4 weeks for posted applications, but processing can take longer for less clear-cut situations.
The publicity surrounding this new requirement has been understated and it is likely many real estate agents are not aware of the change. Accordingly would suggest making mention of the certificate in a contract of sale and particularly with regards to delays to settlement that may be caused by a delay from the ATO in issuing the certificate. It appears that settlement agents and lawyers have had training in this area and have been instructing their clients appropriately.
The requirement for a clearance certificate applies to commercial, residential, rural and vacant land, this also includes your private home.
For more information or to complete an application visit –THE ATO WEBSITE.
If you have any questions about Clearance Certificates please feel free to contact us.
Phil Carulli CA – DIRECTOR