The new law requires Vendors selling property worth $750,000 or more to prove to Purchasers that they are not foreign residents for tax purposes. If a Vendor fails to do this by the settlement date, the Purchaser must withhold 12.5% of the property's value at settlement and pay the money to the Australian Taxation Office (this is a change to the previous law, which required a Purchaser to withhold 10% of the property's value at settlement if the property is worth $2 million or more). The old law still applies for contracts entered between 1 July 2016 and 30 June 2017).

The purpose of the new law is to help the ATO collect capital gains tax on property sales, in situations where it might be difficult for the ATO to enforce Australia's tax laws because the owner is overseas.

Who is a foreign resident?

Generally, a person is a foreign resident if they have not made their home in Australia, they will be in Australia for less than six months, or they have emigrated from Australia. More details of who is a foreign resident for tax purposes can be found on the ATO website.

What should I do if I am a Vendor?

If you are a Vendor who is selling property worth $750,000 or more, and you are an Australian resident for tax purposes, you need to demonstrate your tax status to the Purchaser.

You do this by applying to the ATO for a Clearing Certificate. The application can be made online. If we are preparing a Contract of Sale and Vendor's Statement for a property of yours worth $750,000 or more, we will obtain a Clearing Certificate for you when we prepare the Contract and Vendor's Statement.

It is important that your name on the Clearing Certificate exactly matches your name on your property's Certificate of Title.

The ATO aims to process Clearing Certificate applications that are made online quickly. However, if there are any complications and you are required to make a manual application, it may take the ATO some time to process your application. Therefore, you want to ensure you apply for a certificate long before settlement is due.

A certificate is valid for 12 months from when it is first issued.

If you are a foreign resident, or you are an Australian resident who does not obtain a certificate, the Purchaser is required to withhold 12.5% of the property's value from the settlement proceeds. This has a number of potential consequences:

• While you may be able to claim this money back as a refund on your next tax return, you will not receive the refund until the ATO processes your tax return in the next financial year.
• If you require the funds to discharge a mortgage, you may be unable to settle the sale of your property. This would put you in breach of your contract, potentially allowing the Purchaser to terminate the contract and claim their losses from you.
• If you require the funds to complete a purchase of a new property, you may be unable to complete the settlement of that new property. The Vendor of your new property could potentially terminate that contract, resell the property, and you would be liable to pay them for their losses and penalty interest. Vendors who are Australian residents can avoid this by obtaining a certificate. If you are a foreign resident for tax purposes, you need to be aware that you will not be able to access 12.5% of the purchase funds at settlement.

What should I do if I am a Purchaser?

If you are a Purchaser, it is your obligation to ensure that the Vendor has provided you with a Clearing Certificate before settlement. You need to carefully check to ensure that the Vendor's name on the Clearing Certificate matches their name on the Certificate of Title.

If a Vendor has not provided you with a Clearing Certificate, you need to presume that they are a foreign resident for tax purposes. Prior to settlement, you need to complete the Purchaser Payment Notification Form and lodge it with the ATO. At settlement, you are required to withhold 12.5% of the market value of the property (usually the purchase price). The money that you withhold must then be paid to the ATO.

If you fail to pay the money to the ATO within a timely manner, you as the Purchaser may be liable to pay penalties and interest on the money you ought to have collected from the Vendor and paid to the ATO.

If we are assisting you with the purchase of your property, we will help you comply with these obligations.

Conclusion

The new laws are simple enough to comply with but require diligence on the part of all parties and their solicitors. If you are planning on buying or selling property worth $750,000 or more, we can help you to comply with the new withholding tax laws, ensuring your transaction goes as smoothly as possible.

If you require assistance, please give us a call on 1300 205 506 or send an email to sp@sharrockpitman.com.au.

The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.

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