As of 1 July 2017, all purchasers of real estate entering into a Contract of Sale with a market value of $750,000 or more must withhold 12.5% of the purchase price, unless they are provided with a Clearance Certificate by the vendor.

‘Foreign’ until proven otherwise: Capital gains tax withholding clearance certificate

As of 1 July 2017, all purchasers of real estate entering into a Contract of Sale with a market value of $750,000 or more must withhold 12.5% of the purchase price, unless they are provided with a Clearance Certificate by the vendor. This initiative was recently announced in the Federal Budget, amending the withholding rate from 10% to 12.5% and the purchase price from $2 million to $750,000.

The foreign capital gains tax (CGT) withholding is designed to ensure that any unjust capital gains made by foreign residents do not escape Australian shores. Solicitors or conveyancers can apply for the Clearance Certificate at any time; however, preferably before listing of the vendor’s property. A Clearance Certificate is valid for 12 months and is only granted to Australian residents for tax purposes.

In the event that a Clearance Certificate is not obtained, a purchaser must withhold 12.5% of the purchase price and pay this amount to the Australian Taxation Office at settlement, unless the vendor provides the purchaser with a variation, outlined below. Failure to do so will trigger significant penalties. Late payments may also be subject to general interest charges.

Am I entitled to a Variation?

If a vendor is not entitled to a Clearance Certificate, but nevertheless believes a withholding of 12.5% is inappropriate, a vendor can apply to the Taxation Office for a Variation. There are several circumstances where a Variation application may be deemed acceptable, including where a foreign resident is not making a capital gain on the transaction, not otherwise having an income tax liability, or a situation where there are multiple vendors with only one being a foreign resident.

Special Conditions in your Contract

Contract of Sale must include updated special conditions in relation to the 12.5% CGT withholding, to ensure that both the vendor and purchaser are legally protected and compliant.

Upping the Ante

In light of this new mandatory withholding 12.5% CGT payment, as well as recent legislation by which stamp duty is doubled and land tax is tripled, it will certainly be interesting to see how these tax changes unfold and impact upon Victorian real estate transactions.

For more information on this area please contact Annabelle Yap.

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