When it comes to investments, many medical practitioners choose to invest in property. However, the world of investing in Australian property is an ever-changing landscape. Increasing regulation, paperwork and tax requirements can become overwhelming and confusing. As busy professionals, we understand your desire to simplify the transaction as much as possible. One way to do this is to gain an understanding of the new capital gains withholding requirements.
What is capital gains withholding?
The Australian Taxation Office (“ATO”) first implemented the Foreign Resident Capital Gains Withholding regime from 1 July 2016. It was introduced to assist the ATO with the collection of a foreign resident’s Australian tax liabilities, however, its application affects many Australian taxpayers.
Effective from 1 July 2017 the withholding rules applies to all property transactions where the market value is greater than $750,000, regardless of whether the seller is a foreign resident or not. With the initial regime applied to property transactions of $2 million or more, this significant reduction will affect a greater proportion of the public given rising property prices across Australia. It is highly likely that most property transactions entered into by a medico are impacted.
If you are affected, what’s involved?
The purchaser is required to withhold 12.5% of the purchase price of a property valued at $750,000 and higher, and pay this amount directly to the ATO on settlement, unless the seller obtains a clearance certificate or a vendor declaration.
For contracts that were entered into during the period 1 July 2016 to 30 June 2017, even if the settlement date was after 1 July 2017, the withholding rate is 10% and only applies to property transactions where the contract price is $2 million or higher.
Notably, the burden falls on Australian resident sellers to confirm with both the ATO and the purchaser that they are not a foreign resident in order to avoid the purchaser withholding on the sale. Any amounts that are withheld must be paid to the ATO along with the appropriate form being lodged on or before the day the purchaser becomes the owner of the asset.
What constitutes a property transaction?
The property withholding regime will affect property transactions and transfers of property with market values above $750,000 for the following asset types:
- Australian real property;
- Vacant land, buildings, residential and commercial property.
- Mining, quarrying or prospecting rights where the material is situated in Australia.
- A lease over real property in Australia if a lease premium has been paid for the grant of the lease.
- Indirect Australian real property interests of 10% or more in an Australian entity whose underlying value is principally derived from Australian real property; and
- Options or rights to acquire any of the above asset types.
What constitutes market value?
The ATO generally views and accepts the market value of a property to be the purchase price when it has been negotiated between the seller and the purchaser at arm’s length. However, where the buyer and seller are related parties and did not deal with each other at arm’s length, the ATO will not accept the purchase price as a proxy for the market value. The purchaser will then be required to seek an independent valuation.
A clearance certificate provides certainty to purchasers of Australian real property (details mentioned above) as it confirms that the property withholding tax is not applicable. It is the seller’s responsibility to obtain a valid clearance certificate and to provide it to the purchaser at or before settlement, otherwise the purchaser has an obligation to remit 12.5% of the purchase price to the ATO.
The certificate can be requested online on the ATO website. It may take anywhere from 14 to 28 days to receive the certificate via e-mail. Therefore, the ATO recommends lodging the application well in advance of the settlement date to ensure the certificate is ready before then. The certificate only applies to the entity specified, is valid for 12 months from the date of issue and can also be utilised for multiple disposals of real property over this period. Please refer to the ATO’s website for further details as it provides a comprehensive guide for various circumstances.
A seller may provide the purchaser with a vendor’s declaration to avoid the property withholding requirement for all other property transactions (not Australian real property).
If the seller does not supply a declaration when requested, the purchaser should withhold 12.5% from the purchase price at settlement. A vendor’s declaration is valid for six months from the date it is signed by the seller. The ATO has specified that there is no approved form however, have provided a template on their website for convenience.
The two types of vendor declarations are:
Where a purchaser believes a seller is a foreign resident (seller has an address outside Australia or sales proceeds are to be paid outside of Australia), they can request the seller make a declaration confirming their Australian tax residency. Alternatively, the seller may voluntarily provide a declaration to the purchaser.
2. Not an indirect Australian real property interest declaration
A seller may provide the purchaser with a declaration confirming that the membership interests they are disposing of are not indirect Australian real property interests. They can also confirm where an option is granted, that the membership interests subject to the option are not indirect Australian real property interests.
The ATO has stated that there is may be no requirement to withhold on certain property transactions.
Examples of such circumstances include:
- The acquisition of ownership of a relevant property asset from a deceased estate;
- The seller expects to not incur a capital gain (for example, due to incurring a capital loss or a Capital Gains Tax roll-over applies);
- The seller will not have an income tax liability in Australia (for example, due to carried-forward capital losses or tax losses); or
- There is likely to be insufficient proceeds to cover the withholding and outstanding debt over the asset.
This is not a default exemption. The seller must apply for the exemption/variation by completing an online application on the ATO website.
What happens to the amount withheld?
If an amount is withheld on the sale of a property by the purchaser, the seller will be able to lodge an income tax return with the ATO at the end of the income tax year declaring their taxable income (including any capital gain on the sale of the property) and claim the amount withheld as a credit against the tax payable. Where the seller does not have capital gains tax to pay on the sale, or the amount payable is less that the amount withheld, the excess may be refunded. Note that there are circumstances where an early tax return may be lodged to go through this process sooner.
What you need to do
When it comes to property withholding tax, there is a plethora of obligations you need to understand and many facets of the regime that need to be considered. These rules are complex and need to be considered on a case-by-case basis so we recommend engaging with a professional when considering your property investment.