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.

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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.

Background

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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