Selling property as a foreign resident in Australia demands attention to specific regulations to avoid surprises and ensure a smooth transaction. If you are also planning to sell property as a foreign resident, the following information can help you ensure there are no surprises waiting for you.
Understanding Foreign Resident Capital Gains Withholding (FRCGW)
Foreign resident capital gains withholding (FRCGW) is a crucial consideration for property sales exceeding $750,000. This withholding stands at 12.5%, meaning a substantial sum, at least $93,750, is withheld from the sale proceeds and remitted to the Australian Taxation Office (ATO) unless an approved variation is secured.
Reasons for Seeking Variation
Numerous circumstances may prompt sellers to apply for a variation:
Capital Loss: Instances where the property sale results in a capital loss could warrant a variation application.
Tax Liability: Foreign residents without an income tax liability may need to seek a variation.
Foreclosure: In cases of foreclosure, seeking a variation becomes essential to complete the withholding process effectively.
The Impacts of Late Applications
Late submission of variation applications can lead to significant repercussions, as evidenced by over 60% of applications being lodged tardily in 2023, thereby affecting settlement procedures. When sellers fail to apply promptly, conveyancers or solicitors are left with no recourse but to withhold the standard 12.5%.
Key Tips for Sellers
To make the variation application process easier and ensure a seamless transaction, consider the following tips:
Comprehensive Documentation: Accompany the variation application with all relevant sales contracts to expedite processing.
Timely Submission: Submit variations online at least 28 days before the scheduled property settlement to allow sufficient processing time.
Understanding Exemptions: Note that the main residence exemption doesn’t extend to foreign residents, necessitating careful planning and adherence to regulations.
Clearance Certificate for Australian Tax Residents
Australian residents, for tax purposes, must obtain a clearance certificate before settlement to confirm their tax residency status. This certificate serves as proof, ensuring no withholding occurs during the property transaction process.
By sticking to these guidelines and staying informed about the complexities of foreign resident property sales, sellers can navigate the process with confidence, ensuring compliance and a successful outcome.
Things you need to know about the FRCGW (Foreign Resident Capital Gains Withholding)
Foreign resident capital gains withholding (FRCGW) is a significant aspect of property transactions in Australia. Introduced on 1 July 2016, it pertains to vendors selling certain taxable properties.
The FRCGW tax rate stands at 12.5%. This rate applies to the disposal of real property when the contract price amounts to $750,000 or more.
Special Considerations for Contracts Pre-July 2017
For contracts initiated between 1 July 2016 and 1 July 2017, with settlements occurring after 1 July 2017, a different withholding tax rate of 10% is applicable. This rate applies to real property transactions with a contract price of $2 million and above.
Background and Purpose
The FRCGW legislation primarily serves to aid in the collection of Australian tax liabilities from foreign residents. It imposes an obligation on purchasers to withhold a portion of the purchase price (12.5%) and pay it to the authorities.
Obligations of Foreign Resident Vendors
Foreign resident vendors are required to lodge a tax return at the end of the financial year. This declaration encompasses their Australian assessable income, including any capital gains from asset disposals.
A Tax File Number (TFN) is essential for this process. If a vendor lacks a TFN, they must apply for one. It’s noteworthy that vendors can claim a credit for any withholding amount paid in their tax return.
Exemptions for Australian Resident Vendors
Australian resident vendors can bypass the 12.5% withholding requirement by providing a clearance certificate or a vendor declaration to the purchaser before settlement.
Clearance Certificate: Required for Australian real property transactions. This certificate assures that the vendor won’t face non-final withholding. It’s advisable to obtain this certificate early to avoid settlement delays.
Vendor Declaration: Applicable for other asset types, this declaration confirms that withholding isn’t necessary.
Implications for Australian Resident Vendors without Clearance Certificates
Australian resident vendors who fail to obtain a clearance certificate before settlement are treated as foreign residents for FRCGW purposes. Consequently, they must lodge an income tax return and claim a credit for the amount withheld.
Variations and Declarations for Foreign Resident Vendors
Foreign resident vendors can seek variations of the withholding rate or make declarations regarding the non-applicability of withholding.
Payment Obligations for Purchasers
Purchasers are responsible for remitting the withheld amount to the Commissioner of Taxation at settlement.
Application of the rules
The FRCGW rules come into play when:
- A purchaser acquires a capital gains tax (CGT) asset from a vendor.
- At least one vendor is a foreign resident.
- The asset falls under specific Australian property types.
- The contract was entered after 1 July 2016.
While the primary objective is to address foreign residents’ CGT liabilities, the withholding tax applies universally, irrespective of the vendor’s tax status. Both Australian and foreign resident purchasers are subject to these obligations.
If you wish to learn more about the FRCGW, you can go to the official website of the ATO to contact Clear Tax Accountants. At Clear Tax Accountants, we are a team of professional tax accountants who can help you with your tax obligations.
Call us at 1300 417 399 or email us at admin@cleartax.com.au today!
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