By Julie Barkla
May 18, 2017
The introduction of the foreign resident capital gains tax withholding regime (FRCGW), which came into operation on 1 July 2016, created much nervousness amongst property lawyers. It obliged purchasers of property worth $2,000,000 or more to withhold 10% of the purchase price from settlement proceeds, and remit these funds to the Australian Taxation Office (ATO) immediately following settlement, unless the vendor had provided a clearance certificate evidencing that they were not a foreign resident.
Presumably this regime has been a roaring success, as the Federal Government announced on 9 May 2017 that they would extend the regime, from 1 July 2017, to all real property worth $750,000 or more (ie most real property in Melbourne), with the rate of withholding ramped up from 10% to 12.5%.
In effect, all vendors of property worth $750,000 or more are presumed to be “foreign residents” for the purposes of the Federal Government’s FRCGW regime. Irrespective of whether this is in fact the case, this presumption obliges their purchaser to withhold 12.5% of the contract price and remit it to the ATO. The key exception to this obligation is where the vendor provides the purchaser with a “clearance certificate” from the ATO, at or before settlement.
Rather alarmingly, where a clearance certificate is not provided, and a purchaser fails to withhold and remit to the ATO 12.5% of the purchase price, the purchaser becomes personally liable to the ATO for the amount it failed to withhold. This, in effect, holds the purchaser responsible for meeting the vendor’s taxation obligations.
Wisewould Mahony has a working group of property and tax lawyers who assist vendors and purchasers grappling with the FRCGW regime. We assist vendors by drafting appropriate special conditions, applying for clearance certificates, and/or advising vendors on the impact of 10%-12.5% (depending upon the date the contract is signed) of their purchase price potentially being withheld from them and sent to the ATO. We also assists purchasers to comply with their obligations and ensure they do not find themselves owing the ATO $200,000 or more (or $93,750 or more from 1 July 2017), after they have settled their purchase.