The Sale of Premium Property and Capital Gains Tax Withholding Payments

On 1 July 2016 new subdivision 14-200 of schedule 1 of the Taxation Administration Act 1953 will commence. The purpose of the subdivision is to ensure foreign residents do not avoid their obligations to pay Capital Gains Tax following the sale of taxable property. It is easy to understand the difficulties the ATO faces in recovering capital gains tax payable on the sale of a property if the vendor, and their money, disappear overseas, never to be seen again.

To ensure Capital Gains Tax is paid by the foreign resident, the new subsection stops the money, or at least 10% of the sale price, before it gets into the vendor’s hands. This is so as 14-200 (1) requires a purchaser to pay to the ATO 10% of the sale price, on or before the day in which the purchaser becomes the owner of the property. There are penalties if a purchaser does not do so.

The obligation for the purchaser to remit to the ATO on or before settlement 10% of the purchase price is now dealt with in clause 31.2 of the 2016 version of the Contract for Sale and Purchase of Land developed by the Law Society of NSW and Real Estate Institute of NSW. This clause provides that the purchaser will, at least 5 days before settlement, produce evidence of the purchaser’s submission of a purchaser payment notification to the ATO under 14-200, and will on settlement produce a cheque for the amount payable to the ATO (usually 10% of the purchase price), as part of the monies payable to the vendor.

The consequence of the new subdivision and introduction of cl. 31.2 is that a vendor selling a property will not have access to at least 10% of the sale proceeds on settlement (as those monies are sent to the ATO by the purchaser).

What are the exceptions?!

The foreign resident capital gains withholding provisions do not apply to excluded transactions (14-215). On such excluded transaction is property which has a market value just after the transaction of less than $2 million. As such, a vendor selling a property for less than $2 million will receive all of the sale proceeds on sale, and will not have to chase the ATO for 10% of their sale proceeds.

I am not a foreign resident, what if I sell my property for $2 million or more?

As noted above, from 1 July 2016 a purchaser is obligated to remit to the ATO 10% of the sale proceeds immediately upon settlement of the purchase unless the sale is an excluded transaction. If the property is sold for $2 million or more then it is likely that the transaction will not meet the other exceptions of excluded transactions and the purchaser will be required to pay the ATO 10% of the sale price upon settlement. This is so even if the vendor is not a foreign resident, unless it is proven that the vendor is not a foreign resident by provision of a clearance certificate.

It is the vendor’s onus to contact the ATO and obtain a clearance certificate in relation to every vendor noted on the contract.

If the vendor does not provide a clearance certificate before settlement, then the purchaser will not make their own enquiries as to whether the vendor is a foreign resident, and will simply pay 10% of the purchase price to the ATO on settlement (instead of to the vendor).

If the vendor does provide a clearance certificate before settlement (for all vendors) then clause 31.2 does not apply, and as 14-210 has been met the purchaser will not remit any amount to the ATO and will pay all monies to the vendor on settlement as they direct. The purchaser does not have to settle earlier than 7 days after service of a clearance certificate.

Summary

– From 1 July 2016 purchasers buying property for $2 million or more will remit to the ATO 10% of the purchase price (or market value) on settlement instead of paying the vendor.

– Australian vendors selling property for $2 million or more will need to contact the ATO to obtain a clearance certificate to establish that they are not a foreign resident and therefore exempt from the withholding provisions of the Contract for Sale and Purchase.

– It’s best to obtain the clearance certificate as soon as possible because a purchaser does not have to complete the contract earlier than 7 days after being served with the clearance certificate.

– If you are buying a property for $2 million or more penalties apply if you fail to remit to the ATO 10% of the purchase price (or market value) on settlement, unless in receipt of a clearance certificate.

Prime Lawyers deal in all types of residential property, including premium property exceeding the $2 million Foreign Resident Capital Gains Withholding provisions. If you are buying or selling then get in touch with our property lawyers at your nearest Prime Lawyers office.

We have property and conveyancing lawyers located at Sydney, Parramatta, Sutherland and Wollongong.