Foreign residents' withholding tax to leave locals short for property upgrades

Foreign residents' withholding tax to leave locals short for property upgrades
Foreign residents' withholding tax to leave locals short for property upgrades

Be warned if you are buying or selling your $2 million plus home in NSW, there's new onerous tax paperwork obligations.

The Federal Government has introduced what they dubbed was a foreign residents’ capital gains withholding tax - with the worthy aim to catch foreigners selling up and taking off with all the proceeds.

But is is actually causing severe inconvenience and costly impacts on Australians in suburbia.

The laws makes buyers de facto tax collectors - and the wide tax net being cast will not just catch those few tricky foreigners on their mostly profitable exit from our shores.

It basically requires the purchaser, where the vendor is a foreign resident, to hand over 10 percent of the purchase price towards the Australian Tax Office who will then assess the foreigner's full tax obligations.

But every Australian resident vendor also needs to provide a clearance certificate otherwise 10 percent will head off to Canberra for a time.

The obligation is on the purchaser to ascertain if the vendor is foreign, and if so, then have your solicitor and bank, direct 10 percent to the ATO on settlement. 

It comes with penalties as any purchaser who fails to correctly withhold will pay an administrative penalty equal to the amount of tax they should have remitted to the ATO.  

Where a certificate is provided, the purchaser has no requirements.

Ideally it ought be included by the vendor in the contract on auction day, but the online Clearance certificate application for Australian residents form only became available on ato.gov.au/FRCGW from late June which didn't help its introduction.

Solicitors, who have had to hike conveyancing fees, tell me there have been long delays in obtaining a certificate. 

This means some resident vendors are having rightful funds temporarily withheld from sale proceeds. Chaos if your are off to buy something else.

Any likely prestige vendor this spring ought apply asap to the ATO for a clearance certificate even before the property gets listed for sale as it lasts 12 months.

And also if you think there's a chance the house or apartment will likely fetch $1.9 million, but might fetch $2 million on auction day.

Also get your tax returns in for the past two years because that will assist in the process. If the property ownership and revenue is part of the black economy then expect it to be detected once it goes onto the ATO data base.

If the vendor is an Australian resident, the aim is for a certificate to be issued electronically within days, but data irregularities will trigger weeks of delay.

Any withholding does not affect the transfer of ownership, but it may prudent for a special condition in the sales contract that delays completion until obtaining an ATO certificate.

This all dates to 2012 with the legislation finally becoming law in February this year to take effect from July 1 for property including vacant land, buildings, residential and commercial property, leaseholds and strata title schemes. The government website suggests the $2 million figure ensures the vast majority of residential house sales will be unaffected, though CoreLogic has the number of Sydney suburbs with a median value in excess of $2 million doubling in the space of just a year to 40.

Jonathan Chancellor

Jonathan Chancellor

Jonathan Chancellor is one of Australia's most respected property journalists, having been at the top of the game since the early 1980s. Jonathan co-founded the property industry website Property Observer and has written for national and international publications.

Tags: 
Capital Gains Foreign Investment

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