A raft of changes to the Foreign Resident Capital Gains Withholding Tax took effect on Saturday and will impact real estate transactions that meet certain criteria.
Here is the Eckermann Conveyancers’ summary of the changes for you if you are buying or selling property, and for real estate agents in South Australia.
Why do we have a Foreign Resident Capital Gains Withholding Tax?
In short, this tax was created to hold a percentage of funds from the sale of assets by foreign residents to make sure they pay their tax obligations to Australia.
With foreign residents it can be costly to recover money should they leave Australia, so this withholding tax ensures the Treasury has access to some funds to mitigate that risk.
The reason we are writing about this today is that until now this tax has only affected property sold for $2 million or higher but now many more real estate transactions will be effected.
As of the weekend just past, the threshold has been lowered substantially which means most vendors, purchasers, agents, and conveyancers will need to be aware of what they need to do to avoid penalties or possible settlement delays.
What contracts are affected by the Foreign Resident Capital Gains Withholding Tax changes?
There is a strict distinction between the contracts being effected by these changes, and those that are not.
Simply, if you’ve entered into a contract on or since Saturday, July 1, 2017, and from this point forward, you WILL be effected by these taxation changes.
If you’ve entered into a contract before that date, even if settlement is still to occur, you ARE NOT effected by the changes.
What are the changes to the Foreign Resident Capital Gains Withholding Tax?
There are two changes that have come into effect, and they relate to both the threshold rate and the withholding rate of the Foreign Resident Capital Gains Withholding (FRCGW) Tax.
If you’re buying or selling property for $750,000 or higher, the FRCGW Tax now effects you.
Furthermore, the actual rate of the withholding tax has now increased from 10 per cent of the sale price to 12.5 per cent.
What do vendors (and the agents representing them) need to do?
When a property is on the market for $750,000 or higher, the Vendor should be aware that they will need to arrange a clearance certificate.
It is important to note that every person named on the certificate of title, must apply for a Clearance Certificate.
If you’re an agent, it would be prudent to make sure your vendors are aware of this requirement, who should raise it with their conveyancer as soon as possible.
In most cases, certainly with the Eckermann Conveyancers team, the conveyancer will be best placed to liaise with the Vendor and apply for the Clearance Certificate on their behalf.
For example, in many cases, especially with Australian residents, Clearance Certificates are issued quickly (within a couple of days) and the seller’s funds are able to be transferred to the vendor without any withholding tax.
However, when the vendor is a foreign resident, 12.5% will need to withheld by the Purchaser’s Conveyancer and paid to the ATO unless a variation has been applied for and granted by the ATO.
All parties involved in a settlement should be aware of these new rules because with the lowered price threshhold, there will be many more applications for Clearance Certificates and a significantly increased risk of delay in the settlement process.
As with all things, having sound professionals involved and taking action as soon as possible will be the key to smooth transactions.
Some technical notes for agents
To help us help your vendors, we advise the following steps will increase the odds that your vendor will have a smooth pathway to settlement, namely:
- Make sure instructions are provided to conveyancers straight away after execution so the process of obtaining the Clearance Certificate can be started.
- Make sure to use the latest template Contracts for new Contracts entered into after 30 June 2017 is being used as they have been updated to include details for FRCGW Tax.
- Let the Vendor know about this requirement and urge them to contact their conveyancer with any questions or concerns.
Further to that last point, if you or your vendor are worried about the timeline of getting a Clearance Certificate, they can start the process before they’ve entered into a contract.
If you have any further questions, we are happy to hear from you at any time.