Foreign Resident Capital Gains Withholding Payment

Author: David Dai

New legislation in relation to foreign resident capital gains withholding payments for foreign residents who sell real property in Australia applies from 1 July 2016.
This rule applies to contracts to buy Australian real estate or interests in “Land rich” companies or trusts entered into with a foreign resident vendor.
For real estate transactions valued above $2 million, the purchaser must withhold 10% of the purchase price unless the vendor shows to the purchaser a clearance certificate obtained from the Australian Taxation Office (ATO).
Where no clearance certificate is provided, the purchaser by default is required to withhold 10% of purchase price and remit it to the ATO on or before settlement. Penalties apply for failure to withhold.
In certain circumstances, the ATO allows a variation of the withholding amount by an application from the vendor and an ATO generated variation notice must be given to the purchaser prior to settlement.
Even though the rule targets foreign resident vendors, mismanagement of the process can have an unintended withholding consequence where an Australian resident vendor fails to provide the necessary certificate to the purchaser on or before settlement.
Please note the 10% withholding tax is not a final tax, a refund can be obtained through the filing of the Australian tax return where the income tax is less than the withholding payment.