ATO Capital Gains Clearance Certificate –
Foreign Resident Capital Gains Witholding payments – impacts on foreign and Australian Residents
The Rules have been introduced to ensure foreign residents meet their capital gains tax liabilities. Amounts withheld will be credited against their final income tax liability assessed on foreign residents’ income tax returns.
If the vendor is selling a taxable Australian property with a market value of $750,000 or more, the vendor is required to obtain an ATO clearance certificate and provide same to the purchaser prior to settlement, to confirm a 12.5% withholding amount does not need to be withheld from the sale transaction.
If the vendor (including Trusts, Change of Name, Deceased Estates and Mortgagee’s in Possession) fails to provide an ATO clearance certificate to the purchaser prior to settlement of the transaction, the Rules impose an obligation on purchasers to withhold 12.5% of the purchase price and pay it to the ATO.
The foreign resident vendor must apply for a tax file number (TFN) (if they don’t have one) and 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 can claim the credit for the withheld amount paid to the ATO by lodging a tax return for the relevant year.
Where a purchaser fails to withhold when they should, the ATO may issue a penalty equal to the amount that was required to be withheld and paid to the ATO (plus interest).
A clearance certificate is valid for 12 months from issue, and must be valid at the time it is made available to the purchaser.
The foreign resident capital gains withholding clearance certificate application form is used by Australian resident vendors to notify the ATO that the foreign resident capital gains withholding does not need to be withheld from the sale of taxable Australian real property (the asset). It provides the details of vendors so the ATO can establish the vendor’s tax residency status.
The entity that has legal title to the asset (ie registered proprietor), is the entity required to obtain a clearance certificate for foreign resident capital gains withholding purposes.
If the legal title of the property is in the name of the trustee who is holding the property on behalf of a Trust or Superannuation Fund then it is the Trustee who should apply for the clearance certificate, not the Trust or Superannuation Fund.
As the threshold of $750,000 will impact upon the majority of NSW sale of land contracts, it is important that Vendors apply for an ATO Clearance Certificate sooner rather than later, to ensure that there is no delays.
There might be delays in the ATO processing an application form if the vendor has incomplete tax returns (ie the vendor has not lodged a tax return for the last 2 years or the ATO identifies evidence of poor tax behaviour etc).
The vendor is required to provide the purchaser with an ATO issued clearance certificate no later than 7 business days prior to the date scheduled for settlement of the sale of the asset to ensure no withholding occurs.
Application forms are available to download via the ATO’s website, and there is no application fee for the clearance certificate.
Penalties apply where vendors make false or misleading declarations to the ATO, or where the purchaser fails to withhold funds when they should.
Contracts entered into on or after 1 July 2017 if the sale price is anticipated to be more than $750,000 or above:
- 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 (ie 12.5% of the sale price) at settlement to the Commissioner of Taxation.
Who can complete and lodge the application form
Vendors may either complete and lodge the form themselves or have it completed and lodged on their behalf by a third party, for example a Solicitor or an Accountant.
Neither a Licensed Conveyancers or a Tax Agent are allowed to complete an application form on behalf of the vendor. However, a vendor may provide a completed paper PDF version of the form to a Licensed Conveyancer who may send it to the ATO on behalf of the vendor.
From 27 June 2016, the Licensed Conveyancer can input the client provided information from the hard copy form into the ATOs online system.
- A separate application must be made by each registered owner of the property (ie each vendor named on the sale contract must apply for an ATO Clearance Certificate (ie 2 vendors / 2 applications)
- The applicant’s name must be identical with the name of the registered owner of the property – ie FULL NAME INCLUDING MIDDLE NAMES (IF ANY)
- An on-line application submitted directly by the Vendor is the quickest turnaround time for an ATO Clearance certificate to be issued (ie currently, usually within 7 days). Submission of a paper version of the Application form can take up to 28 days for the ATO process (depending on how busy they are).
- On-line application forms for Australian Residents – https://www.ato.gov.au/FRWT_Certificate.aspx
- PDF version of the application form – https://www.ato.gov.au/uploadedFiles/Content/LB_I/downloads/FRCGW%20-%20clearance%20certificate%20application.pdf
- Instructions for the online clearance certificate application – https://www.ato.gov.au/Forms/Capital-gains-withholding-clearance-certificate-application-online-form-and-instructions—for-Australian-residents/
- A guide for conveyancers – https://www.ato.gov.au/General/Capital-gains-tax/In-detail/Calculating-a-capital-gain-or-loss/Capital-gains-withholding—a-guide-for-conveyancers/
- For more information please refer to the ATO’s website – https://www.ato.gov.au/general/new-legislation/in-detail/direct-taxes/income-tax-for-individuals/foreign-resident-capital-gains-withholding-payments/
NB – The information contained in this Article (and its contents) is general information only. This Article is for reference purposes only and must not be considered as legal or tax advice. If you have any queries regarding the financial or tax implications relating to your sale, please speak to your Accountant or the Australian Tax Office direct.
Penny Browne Conveyancing (published on 14.03.2018)