Buyer Beware: You may need to withhold tax when settling a property purchase

May 10, 2016

UPDATE: It is proposed that from 1/7/17 the following withholding tax rules will apply to property transactions over $750,000 and the rate of withholding will be 12.5%.

New Withholding tax rules apply from 1/7/16 on Australian property transactions over $2m. Australian property includes land and buildings, vacant land, commercial premises and leases. If you are involved in such a transaction there are steps you need to take to avoid potentially large consequences. The withholding tax requirement has been introduced to ensure that non-residents don't escape paying capital gains tax on selling properties but it has also created potential major traps for local purchasers and sellers.

THE REQUIREMENTS

Purchasers:

  • Must withhold tax of 10% of the contract price on property purchases with a value of $2m and over unless the seller has presented them with a Clearance Certificate.
  • The Clearance Certificate is an ATO document declaring that the seller is a resident for tax purposes.
  • If no Clearance Certificate is received by the date of settlement, you must withhold 10% tax regardless of whether the seller is a resident or not.
  • Tax must be paid to the ATO by lodging an online form and obtaining a payment reference number.
  • Payment is due on the day of settlement. The tax is paid to the ATO with the balance of settlement funds is payable to the seller.
  • Importantly if a clearance certificate is not obtained and tax is not withheld, the purchaser will still be liable to pay the tax and therefore may end up paying 110% of the contract price plus penalties if the proper procedure is not followed.

Sellers:

  • If you are a resident of Australia for tax purposes, you must apply for a Clearance Certificate to receive 100% of the proceeds at settlement.
  • If the Clearance certificate is granted and presented to the Purchaser by settlement date no further action will be required.
  • If you have not presented a Clearance Certificate to the purchaser, a credit for the tax paid can be obtained through your Tax Return. You will be assessed on any capital gain made on the sale of the property and claim a credit for the withholding. However a credit can only be claimed once a tax payment confirmation has been issued to you by the ATO. This confirmation will not be issued until after the purchaser has paid the tax.
  • If you are a non-resident you can apply to the ATO online to vary the tax withholding rate to as low as zero if your final tax bill on the sale will be less than the withholding amount (eg if a capital loss was made on the sale or if the property was your main residence).
  • If a variation is approved it must be presented by you to the purchaser by settlement.

Example

A non-resident sold a property for $2m. At settlement $200,000 tax was withheld by the purchaser and paid to the ATO. The property was originally purchased for $1.85m. The capital gain on the sale is $150,000 and this is included in the non-resident's Tax Return. The foreign resident will also include a claim for the tax withheld of $200,000. Tax expense on the $150,000 gain for a non-resident, assuming they have no other Australian income, is $51,900. This is less than the amount withheld and results in a tax refund of $148,100. If the non-resident did not want to wait until they lodged their Tax Return to receive this refund they need to lodge a variation application with the ATO prior to settlement.