When purchasing real property after 1 July 2016, it is presumed that the vendor is a non-resident and the purchaser will be obliged to withhold 10% of the proceeds, register for withholding tax (WHT) and pay it to the Australian Taxation Office (ATO).
The penalty for failing to withhold is equal to the amount that was required to be withheld and paid, unless a Clearance Certificate has been provided.
The Clearance Certificate can be obtained from the ATO and verifies that the vendor is a resident. The certificate must be provided by the vendor in respect of all taxable Australian real property and company title interest. The clearance certificate aims to provide certainty to purchasers regarding their withholding obligations, as it confirms that the withholding tax is not to be withheld from the transaction. The vendor may apply for a clearance certificate at any time at which they are considering the disposal of real property. This can be before the property is listed for sale and is valid for 12 months.
In straightforward cases where the ATO has all the required information, it is expected that clearance certificates will be provided within 1–14 days.
Assets affected:
- real property in Australia – land, buildings, residential and commercial property
- mining, quarrying or prospecting rights
- interests in Australian entities that predominantly have such assets – this is called an indirect interest
If the clearance certificate is not provided by the time of settlement, the purchaser must register and withhold 10% of the payment to the ATO on settlement. In the event that withholding tax has been paid to the ATO, the vendor will need to lodge an Australian tax return. The 10% WHT credit will be offset against any applicable tax and either a top tax or refund will apply.
A non-resident or temporary resident cannot obtain an ATO certificate; therefore, the purchaser will be required to withhold 10%.
Items to consider from the vendor’s perspective:
- When selling, is there a possibility your property may exceed $2 million?
- How should the contract be prepared in order to account for the 10% WHT and to ensure you get full payment upon settlement?
- Ensure that an ATO clearance certificate is completed by settlement.
Items to consider from the purchaser’s perspective:
- Ensure the contract covers the requirement (if applicable) to withholding 10% upon settlement.
- If not, register for withholding tax and pay 10% across to the ATO upon settlement.
- Confirm receipt of either an ATO Clearance Certificate (or the Vendor Residency Declaration if applicable) by the time of settlement.
Different requirements will apply to other non-real property, (known as “Other Assets”) and includes shares, units and options.
Instead of supplying a clearance certificate, a signed Residency Declaration from the vendor can be provided. There are penalties of up to 120 penalty units (i.e. up to $21,600) for false and misleading declarations.
Transactions that are excluded
The new withholding regime will not apply to:
- Real property transactions valued under $2 million
- On-market transactions in relation to shares, units or membership interests listed on an approved stock exchange
- A foreign resident vendor who is under external administration/in bankruptcy or
- Another withholding tax already applies.
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