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Selling a $2 million plus Property?  New requirements and tax rulings

Changes are due to be brought in from 1 July 2016 which will affect properties that are sold with a value at or above $2 million.  A new edition of the Contract for Sale of Land will be issued shortly to address the Commonwealth’s Foreign Residential Capital Gains Withholding Payments measure.

Basically, where a foreign resident disposes of certain taxable Australian property, the purchaser will be required to withhold 10% pf the purchase price and pay that amount to the ATO.

This blog only discusses the new legal and disclosure requirements applicable to conveyances affected by this regime where the Vendor is an Australian resident and does not address other possible tax implications.  The new legislation is largely aimed at capturing foreign resident capital gains withholding payments.  However, it will apply to all parties – including Australian residents – involved in a property transaction with a value of $2 million or more.

A number of assets are affected by this regime, and in this blog we are only considering real property in Australia with a value of $2 million or more.

Clearance Certificates

The legislation introduces a clearance certificate model to provide certainty to purchasers regarding their withholding obligations.  Three new forms are to be introduced:

  1. Clearance certificate application for Australian residents;
  2. Variation application for foreign residents and other parties; and
  3. Purchaser payment notification.

This blog looks at the process around clearance certificates.  However, all of the online forms listed above are to be made available before 30 June 2016 on the ATO’s website.

Australian resident vendors of real property with a market value of $2 million or more will need to apply for a clearance certificate and provide this to the purchaser before settlement.  If a vendor fails to obtain a clearance certificate prior to settlement, the purchaser must withhold 10% of the purchase price and pay this to the ATO.  Accordingly, if an Australian Resident Vendor does not want to miss out on 10% of his/her sale proceeds, they will need to ensure that the clearance certificate is obtained and provided to the purchaser before settlement.

The ATO’s system for issuing Clearance Certificates

The ATO’s system for issuing certificates to Australian residents will be automated.  The information on the application will be checked against information held by the ATO to assess if the Vendor should be treated as an Australian tax resident for purposes of the transaction.  The time frame for issuing the certificates may vary, however the ATO has indicated at this stage that for straightforward cases where the ATO has all the required information, a clearance certificate should be issued within days of the request being made.  For more complex applications or where irregularities or exceptions arise, current estimates are 14 to 28 days.

The key message here for Australian resident vendors selling a premium property from 1 July, is to be aware that this new regime exists and ensure that the application process is commenced early.  Affected vendors considering selling their property can apply for the clearance certificate before the property is put on the market as the clearance certificates have a 12 month validity.

Vendors of premium properties considering putting their property for sale over the next few months must be aware of this additional requirement for the conveyance to be completed on time.  If not, Vendors face the possibility of delayed settlements, potentially losing 10% of the sale price achieved or facing other issues of sales not completing if this requirement is not met.