The Australian Taxation Office (ATO) has changed the rules for clearance certificates yet again this financial year. The new rule was implemented as part of the 2017 federal budget and was in effect from July 1st, 2017. It is due to affect approximately 60% of the housing market.
The small yet important change reduces the requirement for foreign resident capital gains withholding from $2 million to $750,000. In addition, the withholding percentage has been increased from 10% of the purchase price, to 12.5%.
What does this mean?
All vendors selling Australian real property for a value of $750,000 or more will be required to apply to the ATO for a clearance certificate to circumvent the 12.5% withholding tax rate. The certificate is used by the ATO to ascertain whether the buyer is a foreign resident or not.
At settlement, if the clearance certificate is not produced, or the buyer is found to be a foreign resident, the 12.5% tax is withheld from the sale price. In this scenario, money withheld is paid to the ATO and the vendor does not receive full payment for the property.
Who will be affected?
Even though this change was designed to tax foreign investment, it also affects any Australian vendor who is aiming to sell to a foreign party. It reduces the incentive to sell to foreign residents, and adds an extra step to the conveyancing process.
Even though the ATO claims short turnover times for the new clearance certificate, it is evident that more time and money is now needed to complete a settlement. The extra steps will undoubtedly increase legal fees that will be passed on to all buyers, foreign or not.
Australian Institute of Conveyancers president Santina Taranto remarked on the new rules, saying “If you fail to obtain a Clearance Certificate, even if you are an Australian resident, you will be treated as a foreign resident. It’s really a situation of ‘foreign’ until proven otherwise.”
The new rule is another blow for foreign investors in the 2017 federal budget. Other changes include increasing foreign stamp duty surcharges from 4% to 8%, and raising land tax from 0.75% to 2%.