The Foreign Resident Capital Gains Withholding (FRCGW) regime requires the purchaser of certain assets to withhold and remit to the ATO a portion of the purchase price on or before settlement, unless the vendor can demonstrate it was an Australian resident at the time that the transaction was entered into. The vendor can demonstrate himself as an Australian resident by obtaining and providing to the purchaser a Clearance Certificate issued by the ATO (or in the case of certain assets, by completing and providing a Withholding Declaration to the purchaser). The FRCGW has been in force since 1 July 2016. On 9 May 2017, the Federal Government announced the substantial changes below to the rate and threshold of FRCGW.
1. Disposals of a direct interest in Australian real property from 1 July 2017 (where contracts are exchanged after 1 July 2017) will be captured by the FRCGW regime if the market value is $750,000 or more. (The original regime only invoked where the market value is $2 million or more). Where the purchaser and vendor are at arm’s length, the ATO will accept the purchase price as the market value; and
2. For the contracts settled on or after 1 July 2017 where the new FRCGW applies, the withholding tax rate is increased to 12.5% from 10%;
3. If a contract is entered into prior to 1 July 2017, the existing $2 million threshold and 10% withholding rate will apply, even if settlement occurs on or after 1 July 2017.
If the vendor is Australian resident for tax purpose and his property was captured by the regime, he should provide a valid clearance certificate to the purchaser on or before the settlement of the transaction. The clearance certificates are normally valid for 12 months, and can be used by the same vendor for the sale of multiple properties while valid.
To avoid substantial penalties, purchasers should ensure that relevant amount is withheld from the purchase price if they do not receive a valid Clearance Certificate.
If you need help in obtaining a ATO clearance certificate or understanding the above, please contact one of our tax consultants at The Quinn Group on (02) 9223 9166 or submit an online enquiry.