What agents need to know about the foreign resident capital gains withholding tax
29 September 2017 Donna Webeck
Vendors are at risk of missing out on a chunk of their property’s final sale price following amendments to the Foreign Resident Capital Gains Withholding regime.
Changes to the rules came into effect on July 1 requiring all vendors whose properties are valued over $750,000 to obtain a clearance certificate from the Australian Taxation Office proving it is not foreign owned — previously this only applied to properties valued over $2 million.
The dramatic reduction in the price threshold, along with some confusion about whether the nationality of vendors comes into play has raised concerns by some that the law changes may not have filtered through to agents.
Teresa Kearney, a senior associate with Radcliff Taylor Lawyers and who specialises in real estate, recounts one example when the seller was penalised for failing to obtain the certificate.
“In one case, the lawyer for the vendor thought the new law didn’t apply as the vendor wasn’t a foreign person,” she said.
“However, the law requires a clearance certificate for all land sales from $750,000 upwards.
“The ideal time to apply is at the first listing of the property as this secures the agent’s commission as well as protecting vendors and purchasers.”
Vendors will generally receive their clearance within days, and the certificate is valid for 12 months.
If a vendor fails to provide a clearance certificate before settlement, the purchaser must withhold 12.5 per cent of the market value from the proceeds upon settlement and pay it to the ATO, Kearney said.
“The vendor may claim the amount paid in the next tax return, taking into account any tax that may be payable,” she said.
“If the property has a mortgage and the amount to pay out the bank and pay commissions and sale costs exceeds 87.5 per cent of the price, then the vendor may not be able to settle as the bank will not provide a release.
“This would be a breach of contract and could result in liability for damages. If a purchaser fails to withhold the 12.5 per cent and pay that to the ATO, the purchaser is also liable and may suffer penalties as well.”
Despite some concerns, Real Estate Institute of Australia president Malcolm Gunning remains confident real estate agents, lawyers and conveyancers are across this law change.
“All of our members have been well informed [and] also we’ve consulted with the law societies in each of the states and lawyers are up to speed,” he said.
According to Gunning, of the approximately 10,500 clearance certificates issued since July 1, there have been only a few cases of non-compliance identified subject to penalties.
“At this stage, the feedback we have from the ATO is that it’s going along reasonably well. There haven’t been too many hiccups.”
But while Gunning is confident his members are aware of this additional legal requirement for vendors, there is some dismay at the responsibility it brings.
“We’re comfortable, but we’re not happy – and neither is the law society – that we are the gatekeepers as far as the ATO is concerned,” he said. “But at this stage its procedural.”
From Gunning’s perspective, he sees agents as more of a “cross-check” in the entire clearance certificate process.
“From the agent’s point of view, it’s a matter of knowing [about this law change] because often it might be raised during that listing process,” he said, something Kearney agreed with.
“The agents and lawyers are just part of the process in ensuring the certificate is obtained,” she said. “Our procedures now include a note in the first letter and checklists to ensure this.”
And as for auctions, when the final sales figure is still unknown? Gunning suggests this: “That’s where agents say ‘look, this could sell over $750,000, I suggest you get a clearance certificate just in case’.”
Date: 10 AUG, 2017