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New 10% foreign resident capital gains withholding tax for property over $2 million

If you are buying or selling a property for over $2 million after 1st July 2016, the new foreign resident capital gains withholding tax regime may have a big effect on your transaction. As an example, on a sale of just $2 million, this could result in $200,000 being withheld by the purchaser and sent to the Tax Office.

While the new regime applies to all types of property, with the average price of Sydney’s Eastern Suburbs property being way above the median Sydney house price of $1 million, this will potentially impact a large number of property sales in this area.

It’s not just foreign residents who may be affected by the foreign resident capital gains withholding tax changes

Whilst, as the name suggests, this new regime is targeted at foreign residents, it will actually effect all people in the $2 million plus property market. The burden to prove that the regime does not apply, falls on the seller, who must demonstrate to the buyer that they are not a foreign resident.

The Impact on Sellers of Property

A seller will have to provide the purchaser with a clearance certificate, which has been provided by the Tax Office, prior to settlement to ensure that they receive the full proceeds from their sale. If the certificate is not provided in time, then the purchaser is required by law to withhold 10% of the purchase price and pay it to the Tax Office. Sellers can apply to have this money released to them where it has been mistakenly withheld, but this may be a lengthy process.

As this is a totally new regime, the Tax Office cannot give an accurate time frame for how long it will take to receive a clearance certificate, but they are currently saying between 1-28 days. With the average settlement time in the Sydney property market being 42 days, it will be essential that you act quickly to ensure you receive the full amount of the sale of your property without needing to wait for the Tax Office to process a refund.

The Impact on Buyers of Property

Where the buyer doesn’t receive a clearance certificate from the seller, then on settlement, the buyer will be required to send 10% of the property purchase price to the Tax Office. It is worth noting the penalty if the purchaser fails to do this, is the amount of tax that should have been remitted!

What to do

While at first glance the proposed change may seem fairly straightforward, like any law there may unforeseen issues and it pays to get advice well beforehand. For example if you are likely to be a future seller of a property over $2 million, the Tax Office will be determining whether you are a foreign resident for tax purposes. If there was any doubt about your residence status, advice obtained now may potentially be very beneficial.

The best course of action regardless of whether you are a buyer or seller of property is to talk to your legal adviser now to ensure that you know how the new laws may impact on you..

Disclaimer

This article does not constitute legal advice and is general in nature only and should not be relied upon in any way. You need to seek your own legal advice to ensure that is appropriate to your specific circumstances.

Further Reading

For further reading you can follow this link to the relevant page of  the Australian Taxation Office website

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