Capital gains withholding: Impacts on foreign and Australian residents
Foreign resident capital gains withholding are applied to vendors disposing of certain taxable Australian property, under contracts entered into from 1 July 2016. A 10% non-final withholding was applied to these transactions at settlement.
New rules for foreign resident capital gains withholding (FRCGW) apply to vendors disposing of certain taxable property under contracts entered into from 1 July 2017.
The changes will apply to real property disposals where :
- the contract price is $750,000 and above (previously $2 million)
- the FRCGW withholding tax rate will be 12.5% (previously 10%).
The existing threshold and rate applies for any contracts entered into from 1 July 2016 and before 1 July 2017. Even if the property is not due to settle until after 1 July 2017.
Australian resident vendors selling real estate property must obtain a clearance certificate from the ATO prior to settlement. This will ensure they don’t incur the 12.5% non-final withholding tax.
This existing withholding legislation assists the collection of foreign residents’ Australian tax liabilities. It imposes an obligation on purchasers to withhold 12.5% of the purchase price and pay it to us, where a vendor enters into a contract on or after 1 July 2017 and disposes of certain asset types (or receives a lease premium for the grant of a lease over Australian real property).
The foreign resident vendor must lodge a tax return at the end of the financial year; declaring their Australian assessable income, including any capital gain from the disposal of the asset. The vendor may claim a credit for any withholding amount paid to us in their tax return.
- Australian resident vendors can avoid the 12.5% withholding by providing one of the following to the purchaser prior to settlement:
- for Australian real property, a clearance certificate obtained from the ATO
- for other asset types, a vendor declaration they are not a foreign resident.
- Foreign resident vendors may apply for a variation of the withholding rate or make a declaration that a membership interest is not an indirect Australian real property interest and therefore not subject to withholding.
- Purchasers must pay the amount withheld at settlement to the Commissioner of Taxation.
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