Are you a Australian, a Foreigner or a non-tax residents of Australia who had acquired an interest in the Australian houses before and is thinking to sell it in the coming months, please read the following article to understand the recent changes to the tax legislation which might mean you might not even get the full amount of sales price at the time of settlement.
Are you also thinking to purchase a property post-July 2017, please read on to understand your obligation and the pitfall which might impose if you do not follow the correct procedure, which means you might have to pay the penalty up to 12.5% of the property value for the vendor.
It is important to note that foreigners need to obtain FIRB approval from the Foreign Investment Review Board which was previously governed by the Department of Treasury under the Department of Foreign Affair and Trade.
However around two years ago, the administrative side of it was given to the Australian Taxation Office, and since then there have been many tightening of policies in term of foreigner ownership of property in Australia.
One of the policies which were introduced last year was the Foreigner Capital Gain Withholding Tax, in which the government imposes the responsibility of collecting the capital gains tax to the buyers rather than chasing the seller for the tax.
A capital gain or capital loss on an asset is the difference between what it costs you and what you receive when you dispose of it.
Their rationale is that the government felt it is tough to recoup those capital gains tax from the foreigners once they disposed of the property in Australia.
Previously, the threshold to withhold the foreigner capital gain withholding tax triggers when the disposed of the property exceeds the $2million threshold, however, in the May 2017 Federal Budget, the threshold has been slashed to $750,000.
Besides, the withholding tax rate has been increased from 10% to the 12.5%.
This means that any time a property worth $750,000 or more is sold, the seller will need to provide a certificate from ATO certifying that they are a tax resident.
Failure to do so will mean that the buyer needs to withhold 12.5% of the property value and only paid the seller the amount of 87.5% of the property value at the time of settlement.
Failure to withhold the amount will then become the buyer’s liability, and it is essential that the purchaser will need to remit that withheld amount to the ATO in a stipulated time frame without attracting penalty from the ATO.
We had provided an illustrative example to demonstrate the concept
If John Bloke sells a property to Peter Smith for $800,000.00, and the property was purchased by John around 5 years ago for $600,000.00, then John needs to approach a tax agent or tax lawyer to obtain the clearance certificate from the ATO. Normally the processing time is around 28 days.
At the settlement, Peter needs to sight the original copy of the clearance certificate, NOT a copied version, and once view it, Peter can then proceed with the settlement and transfer the $800,000 to John to settle the house.
If John is unable to provide that clearance certificate, then Peter needs to withheld $100,000 from the property value, and remit the withheld amount back to ATO in a stipulated time frame, and lodge an appropriate form to the ATO to record that.
If John’s real estate agent or Peter’s Conveyancer did not inform Peter about such tax, and Peter transfers the total fund to John without sighting the original copy of the clearance certificate, then Peter is liable to pay the $100,000 in the form of penalty to ATO once ATO audits the case.
When that happens, usually Peter would want to have recourse against the real estate agent or the conveyancer in term of getting relief from the damages. Hence the real estate agent and the conveyancer has a fiducial duty to inform the buyer and the seller about such a tax to avoid potential legal litigations from the purchaser.
Also, it is important to understand that the tax you being withheld by the buyer forms part of your tax offset, and normally you should be able to get a tax refund at the end of the year depending on your actual tax position.
Let take an example of this John and Peter’s case.
If John had purchased this property for $600,000 around 5 years ago and sells for $800,000, the gain is $200,000.00.
As a non-tax resident, he usually can not enjoy the same Capital Gain Tax Concession as an ordinary tax resident, and as such he might not be able to enjoy the 50% CGT discount for holding an asset for more than 12 months.
The tax on that 200,000 gain would be subject to the non-resident tax rate, which would be $71,684.
However, he has already been withheld $100,000, hence if John has a tax file number, and lodge his tax return at the end of the year; then he should be able to get a refund of $28,315.45.
Hence it is important he approaches a good accountant or tax agent who understands the in and out of the foreigner capital tax withholding tax.
Please give us a call on 0410-829-900 or email us at email@example.com, hence we can get the clearance certificate for you at the time of disposing the property in order for you to avoid the many pitfalls associated wiht this foreigner capital gain withholding tax.
Also please come to our seminar on 9th June @Ultimo Community Centre at 630pm, we will explain in more detail the implication of the federal budget and the movement of the Australia property going down to the future. To register please visit
to register please click: http://sydneyproperty.eventbrite.com.au
Disclaimer: The information in this article contains only information and is not of advice, it does not take into account or fit into any’s personal circumstances, please seek independent legal and tax advice.