If you are thinking about selling Australian property valued at $2m or more, your ever growing To Do list should include this item: “Get Tax Office clearance certificate”.
Sweeping tax law changes from 1 July 2016 mean that unless you get special tax clearance as a “resident”, the purchaser of your property must deduct 10% from the purchase price and pay that amount to the Australian Taxation Office (ATO).
Put simply, affected ‘soon to be property vendors’ who are expecting to receive 100% of the sales proceeds (ignoring any bank debt) will have to enter into a formal ATO “vetting” process in order to prove their residency status.
The obligation to withhold only applies for transactions entered into post 1 July 2016. This means that property deals executed before 1 July but which do not settle until afterwards will not be caught by these rules.
While the broad objective of these requirements appears to be aimed at combating perceived tax avoidance by foreign vendors of Aussie property, the legislation is designed in such a way to capture all sales of Australian property interests valued at $2m or more.
In other words, the default position from the start of the next financial year is that you will effectively be classified as an overseas investor unless you provide the purchaser with an ATO clearance certificate. Even if you were born and raised in Australia and continue to live here, you’ll still need the blessing of the tax office to ensure that 100% of the sales proceeds are available to you. Notably, the fact that the purchaser knows the vendor to be a resident is irrelevant.
The clearance certificate comprises a six page form and is now available to download from the ATO website. Fortunately, there is no fee for clearance certificate applications. Clearance certificates are valid for 12 months from issue, and must be valid at the time it is made available to the buyer. For applications submitted online, most certificates will be issued electronically within a few days. Paper applications may take up to 2–4 weeks to process.
Penalties for purchasers who don’t withhold the required amount are severe, basically 100% of the amount not remitted to the ATO ie. a further 10% of the purchase price.
Some transactions are excluded from these rules, namely property valued at less than $2m and transactions involving company title interests valued at less than $2m and transactions that are already subject to an existing ATO withholding arrangement.
The legislation incorporates a variation measure (similar to PAYG on salary and wages variation) which if approved by the ATO would enable the transaction to be completed without having to withhold. Reasons the ATO may permit variation would include that no tax liability will arise or that there are multiple vendors with only one foreign resident.
Importantly, the only way vendors can get a refund for any amounts paid to the ATO is by lodging a tax return. This could prove problematic for some particularly those vendors who are not up to speed with their annual tax return filings or whose reported levels of taxable income raise speculation about the affordability of the property being sold.
It will be interesting to see if the Government increases the threshold beyond $2m in years to come as rising property prices will inevitably bring more people into the system.
An important implication under these rules is early ATO engagement…one wonders how this might ultimately play out from an ATO compliance and audit perspective.