New Tax On Sale of $2 Million+ Properties

The Issue

The Federal Government is concerned that property owners, particularly foreign persons are not paying Capital Gains Tax on the sale of property.


The Law

On or after 1 July 2016 on the sale of Affected Property, the Buyer will have to withhold 10% of the sale price and pay that to the Australian Taxation Office (ATO) unless the Seller has a Clearance Certificate.

Residential Properties under $2 Million at market value will not be Affected Property.

If the withholding tax is not paid then the ATO may pursue the Buyer for the tax that should have been paid as well as interest leaving the Buyer to recover that money from the Seller like the current GST regime.

  • Affected Property

This withholding is limited to taxable Australian property, being:

  1. Real property in Australia – land, buildings, residential and commercial property;
  2. Lease premiums paid for the grant of a lease over real property in Australia;
  3. Mining, quarrying or prospecting rights;
  4. Interests in Australian entities whose majority assets consist of the above such property or interests – this is called an indirect interest;
  5. Options or rights to acquire the above property or interest.
  • Exclusions

If a foreign resident Seller falls within one of these categories then the 10% withholding tax is not applicable:

  1. Real property transactions with a market value* under $2 million, ensuring that the vast majority of residential house sales will be unaffected by this measure;
  2. * Note: if a sale price negotiated between a Seller and a Buyer is on an arm’s length basis, then the sale price may be used as a proxy for market value.

  3. Transactions listed on an approved stock exchange;
  4. The foreign resident Seller is under external administration or in bankruptcy.

The Solution

If a Seller doesn’t want 10% of the sale price given to the ATO the Seller will need to get a Clearance Certificate before settlement.

Only a Seller who is not a foreign person for taxation purposes can get a Clearance Certificate.

The Clearance Certificate confirms that the withholding tax is not to be withheld from the transaction.

The Seller may apply for a Clearance Certificate at any time they are considering the disposal of Affected Property. This can be before the property is listed for sale. The Clearance Certificate will be valid for 12 months and must be valid at the time the Certificate is given to the Buyer prior to settlement.

The Application for a Clearance Certificate (as will the Buyer’s payment protocol) will be on line and the ATO will set up that link on 27 June 2016 but for now click here to read the ATO fact sheet ato.gov.au/FRCGW

The Buyer of Affected Property should withhold the withholding tax from the Seller at settlement and pay that to the ATO unless the Seller provides a Clearance Certificate. If the withholding tax is not paid then the ATO may pursue the Buyer for the tax that should have been paid leaving the Buyer to recover that money from the Seller like the current GST regime.


The Rhino Rule

If you are buying or selling a property over $2 Million be very careful or you may find yourself paying penalties and interest to the ATO.

If you are the Buyer of an Affected Property you must pay the withholding tax to the ATO without delay as penalties and interest may apply to late payments.

If you are the Seller of an Affected Property get a Clearance Certificate and give that to the Buyer before settlement.