Selling property for more than $2 million – make sure you get a clearance certificate first4 August 2016 | General
From 1 July 2016, any Australian resident (for taxation purposes) who enters into a contract to sell property with a market value of $2 million or more will need to apply to the Australian Tax Office (ATO) for a clearance certificate and provide a copy of this certificate to the purchaser prior to settlement.
If a valid clearance certificate is not provided to the purchaser by settlement, the purchaser will be required to deduct and withhold 10% of the purchase price and pay this to the ATO as if the vendor was a foreign resident. If the purchaser fails to do so, the ATO will hold the purchaser liable and a penalty may be imposed.
This new rule has been introduced by the Australian Government to assist in the collection of the 10% non-final withholding tax which applies to the disposal of property by foreign residents and will apply only in respect of:
the sale of taxable Australian real property which includes:
- vacant land, buildings, residential and commercial property in Australia;
- mining, quarrying or prospecting rights for minerals, petroleum or quarry materials situated in Australia; and
- a lease of land in Australia where a lease premium has been paid for the grant of the lease; and
- the sale of a membership interest of 10% or more in an entity which has Australian real property as the majority of its assets (an “indirect Australian real property interest”) which causes a right of occupancy of the land or any building erected on the land to arise.
The property must also have a market value of $2 million or more and the rule will apply only to contracts entered into on or after 1 July 2016.
If there is more than one vendor who owns the property being sold, each vendor will need to supply the purchaser with a clearance certificate.
To obtain a clearance certificate, a free online “Foreign resident capital gains withholding clearance certificate” application will need to be submitted through the ATO’s website by the vendor or the vendor’s solicitor or tax agent (which will be available to complete from 27 June 2016).
Most certificates will be issued within a few days and the certificate will be valid for 12 months from the date of issue (so it can be used for multiple disposals).
The ATO is encouraging vendors to obtain a clearance certificate as early as possible in the sale process and has advised that an application can even be made before the property is listed for sale.
The 10% withholding obligation will also apply to the following asset types (regardless of value):
- the disposal of an indirect Australian real property interest; and
- the grant of an option or right to acquire any type of real property or an indirect Australian real property interest.
However, a vendor will not have to obtain and provide a clearance certificate for these asset types. Rather, a vendor will have to provide a “vendor declaration” to the purchaser that the vendor is an Australian resident or that a membership interest is not an indirect Australian real property interest. This declaration can be given by inserting a warranty to this effect into a sale agreement. Any declaration will be valid for 6 months from the date it is made.
While these new rules may seem relatively straightforward, there are a number of exceptions which apply and which need to be carefully reviewed. For example, no declaration is required when a vendor is disposing of an interest in an entity on an approved stock exchange (such as the ASX).
For further information on this topic, or if you have any questions about these changes might affect you, please do not hesitate to contact a member of our Property & Commercial team.