In 2016, the Government introduced the Foreign Resident Capital Gains Withholding Scheme (“the FRCGW Scheme”) which requires a foreign person or entity who sells certain property which they own in Australia to pay tax on the sale.
As of 1 July 2017, a foreign person or entity who sells certain property in Australia for a price of $750,000 or more must pay to the ATO a rate of 12.5% of the contract price on settlement of the transaction.
The FRCGW Scheme
The FRCGW Scheme is structured as “Foreign until proven Australian”. That means that any person or entity who sells certain property in Australia for a price of $750,000 or more is required to obtain a clearance certificate from the Australian Taxation Office (“ATO”) to certify that they are not a foreign person or entity and therefore do not need to pay 12.5% of the contract price to the ATO on the settlement of the sale.
If the seller of a property is unable to produce a clearance certificate which matches the name registered owner recorded on title of the property, then the onus falls on the buyer to withhold 12.5% of the contract price from settlement to pay the withholding tax to the ATO.
What property does this apply to?
The FRCGW Scheme applies to:
- real property in Australia – including vacant land, buildings, residential and commercial property, mining quarrying or prospecting rights; and a lease over real property in Australia, and
- other assets – which include indirect Australian real property interests in Australian entities, whose majority of assets consist of real property in Australia and options or rights to acquire any of the above asset types.
Example of other assets
If you are the sole shareholder of a company which owns three properties, which combined have a market value of $1.2 million, and you sell 100% of the shares in the property to a buyer, you are caught by the FRCGW Scheme and must provide to the buyer a clearance certificate in your personal name as seller of the shares to certify that you are not foreign and no withholding tax is required to be paid to the ATO on settlement.
Valid clearance certificate
A clearance certificate is valid for 12 months from the date of issue. For the purposes of the transaction, the certificate must be valid on the date it is made available to the buyer.
Clearance certificates are issued for the person named in the clearance certificate and are not property specific, so a seller may utilise the same clearance certificate for the sale of multiple properties provided that settlement of the properties are within the 12 months which the clearance certificate is valid.
Clearance certificates are issued for individuals or corporations so if the seller is a married couple who own the property jointly, each seller must apply for a clearance certificate in their own name.
The ATO allows a seller to apply for a variation where the seller believes that the balance sale proceeds at settlement will not allow sufficient funds remaining for 12.5% of the contract price to be retained and paid to the ATO (for example if the outstanding balance on the mortgage is in excess of 90% of the purchase price). In this instance, if the variation is approved, the ATO may reduce the rate of retention required on the sale.
Note, a variation notice will be different to a clearance certificate in that it will specify the property to which it applies to and include an expiry date on the notice.
Foreign, but not always
In September 2017, the Queensland Titles Registry and the Office of State Revenue (“OSR”) introduced new requirements to be included in the Form 24 Property Information when selling or purchasing property and when stamping the contract and Form 1 Transfer to pay transfer duty.
The two institutions introduced a new question to be completed by the seller – “Is the transferor a non-Australian entity?”.
If the seller is indeed a foreign person or entity, the seller must complete and provide to the OSR an identity details annexure in which must include details of the seller’s country of residence for tax purposes, nationality of citizenship, passport number and country of issue, visa information and Foreign Investment Review Board (“FIRB”) application number from when the property was purchased.
A person or entity is considered a non-Australian entity when selling property if:
- an individual is not an Australian citizen (this is regardless of whether they are a permanent resident),
- a company is incorporated outside of Australia,
- a trust whose country of tax residence is not Australia, or
- another body formed outside of Australia.
Unfortunately, the contradiction exists where, for the purposes of selling a property, a permanent resident of Australia is considered a foreign entity despite when purchasing the property, no FIRB approval was required, Additional Foreign Acquirer Duty (“AFAD”) was not required to be paid and the permanent resident was entitled to the same concessions on transfer duty as would an Australian Citizen.
How we can help
Quinn & Scattini Lawyers regularly assist vendors and purchasers with their property and business purchases/sales. We are able to not only assist with the conveyancing but also offer advice to assist clients so that they do not face the situations outlined above.
Why choose us?
You will be talking to a real expert, local to you. You will not be treated like a number, but as a real person, and a person who may be going through a difficult and stressful experience. Get expert advice, not just what you want to hear, in a language you can understand, not legal jargon.
Q&S’s expert will lawyers are available at any of Q&S’s seven office locations.
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