The latest Federal budget proposed a number of amendments to the capital gains tax regime. A particular focus of these changes are directed to addressing housing affordability in Australia while also seeking to improve compliance by foreign investors of their tax obligations. These amendments built upon regulations introduced in last year’s budget.
The current regulations apply where two requirements are met:
- Relevant Asset: There must be a transfer of a Relevant Asset. Currently for an asset to be considered a Relevant Asset it must be some form of a real property interest with a market value of $2 million or more. This includes commercial and residential properties and leases.
- Foreign Vendor: The vendor in question must be considered a Foreign Vendor. This occurs when either the purchaser reasonably believes the vendor is a foreign resident or does not reasonably believe the vendor is an Australian Resident. Alternatively, a vendor will be considered a foreign resident in the event that a valid Clearance Certificate is not available at the transfer of a Relevant Asset.
Two fundamental amendments to the Foreign Resident Capital Gains Withholding Tax Regime proposed this year will begin to affect property contracts made on or after 1 July 2017, which are as follows:
- The threshold value for properties subject to this tax regime will be reduced from $2,000,000 to $750,000; and
- The withholding tax rate which applies to these transactions has increased from 10% to 12.5%.
An effect of these changes is that lawyers and conveyancers will increasingly fill a pseudo tax collector role by ensuring that a portion of funds stemming from property sales is withheld during the settlement process and paid to the Australian Tax Office (ATO) when required.
Who will be affected?
The legislative purpose of these alterations is to provide a means by which the ATO may ensure that foreign investors pay tax, which logically should positively affect housing affordability. However, due to the threshold change identified above, a vast majority of property transactions will now be caught by this requirement. It has been estimated that the current $2,000,000 value threshold captures only approximately 10% of Australian properties, while under the new $750,000 value threshold, in excess of 60% of properties will become subject to this regime. A vast majority of conveyancing matters will now have to deal with this additional bureaucratic step.
What happens if you are subject to this new regime?
In the event that a property transaction is above the threshold alluded to above, and the vendor does not obtain a valid Foreign Resident Capital Gains Withholding Tax Clearance Certificate, the legislation requires that the purchaser must retain 10% (or 12.5% after 1 July 2017) from the purchase price and transfer this to the ATO. Where the purchaser fails to withhold this amount and pay the ATO, the ATO will seek payment from the purchaser in any event (in addition to a general interest charge). From the vendor’s perspective, unless a Clearance Certificate is obtained, they will now have a portion of the settlement amount withheld by the purchaser for payment to the ATO.
How to Obtain a Clearance Certificate
A Clearance Certificate can be obtained through an application to the ATO provided that the vendor can establish they are an Australian Resident. This process will typically be completed by the parties’ solicitor or conveyancer, in conjunction with a client’s accountant if necessary. Furthermore, depending on whether the vendor is classified as a company, trust or individual there is a requirement that the party applying for a Clearance Certificate provides either a Tax File Number or an Australian Business Number.
The ATO currently advises that a Clearance Certificate application currently will take a minimum of 14 days. However, as demonstrated above a vast majority of property transactions will soon require a Clearance Certificate and it is anticipated that the processing times of these applications will substantially increase. As stated by the President of the Australian Institute of Conveyancers, Santina Taranto “if you fail to obtain a Clearance Certificate, even if you are an Australian resident, you will be treated as a foreign resident. It’s really a situation of foreign until proven otherwise”.
In proposing this new regime, the Federal Government has failed to provide an adequate public awareness campaign to ensure that Australians are aware of these new requirements. As a result, it is left to the legal profession to advise their clients of the new withholding threshold and the importance of obtaining a Clearance Certificate. Many Australians are likely to be caught off-guard by these new requirements, and as discussed above, this could prove to have a significant impact on purchasers and vendors.