Recent changes to the Foreign Resident Capital Gains Withholding (FRCGW) regime mean that more Australian residents are likely to be affected by the tax for transactions as common as the sale of the family home.
As its name suggests, the FRCGW rules (which started on July 1, 2016) require the purchaser to withhold a portion of the sale price of assets sold by foreign residents to address concerns that foreign residents were not meeting their tax obligations.
But unless Australian residents also comply with the rules and prove they are not subject to the withholding tax, they can also be caught up in it, particularly with real estate transactions.
Following the most recent Budget, the Federal Government made two key amendments to the rules that apply to contracts entered into from 1 July 2017:
- The rate of withholding has increased from 10 per cent to 12.5 per cent.
- The threshold for real property has dropped from $2 million to $750,000.
Thus, if someone sold a home for $1 million, for instance, there could be $125,000 in withholding tax.
Robyn Jacobson, a senior tax trainer at TaxBanter, says the tax can also apply to Australian residents and its name is misleading.
“People look at the title and think, ‘Oh, it doesn’t apply to me because I’m not a foreigner’,” she says.
“Yes, it applies beyond foreign residents.”
The tax can also apply to certain shares in companies, units in unit trusts, rights and options.
How the new rule works – and why Australian residents need to pay close attention
The way the tax operates is that the purchaser of an Australian asset needs to withhold 12.5 per cent of the purchase price and pass that on to the Australian Taxation Office by settlement – unless the vendor has a clearance certificate in the case of real property or a vendor declaration in the case of shares, units, rights and options. The vendor then claims a credit for the withheld amount in their tax return.
Critically, says Jacobson, all vendors (including Australian residents) selling real property are considered foreign residents for this purpose unless they obtain a clearance certificate, and this is where Australians can be subject to the regime if they are unprepared.
For a resident selling a property over the $750,000 threshold, if they don’t have a clearance certificate, the purchaser will be required to withhold 12.5 per cent of the purchase price, creating obvious financing and administrative difficulties.
If a purchaser buys a property where the vendor does not provide the purchaser with a clearance certificate and the purchaser fails to withhold 12.5 per cent of the purchase price, they could be liable to pay that to the ATO and a $2100 penalty, as well as a further penalty equal to the amount of money that should have been withheld. This can apply to Australian as well as overseas purchasers.
In many instances, the outcome could be a delayed settlement or cash flow issues for the vendor, but there are potentially more severe consequences as well.
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The accountant’s role in advising clients
Another way the tax can affect property sales is if a sale contract states that the purchaser has agreed to pay a vendor, for example, $1 million for a property, and there is no provision in the contract for the withholding tax to be taken out of that purchase price, potentially leading to disputes.
The tax applies even where an Australian resident is selling the family home to another Australian resident and there is no capital gains tax to pay. Now that the threshold has dropped to $750,000, many more people will be captured by the regime.
Jacobson says she personally is not aware of anyone who has been fined, but adds: “I have definitely seen people who didn’t get a clearance certificate and didn’t withhold because they didn’t know they had to.”
Many lawyers and conveyancers are not aware of the changes and so accountants should be trying to inform their clients, Jacobson says.
“The message to accountants is it doesn’t matter if your client is a vendor or a purchaser. They need to be getting information from you ahead of the transaction, because we don’t seem to be able to count on the conveyancers to get this right in all cases,” she says.
Further, conveyancers (who are not lawyers) cannot give tax advice. Nor can they apply for clearance certificates on behalf of their clients – this can only be done by the vendor themselves, their lawyer or their accountant.
“There’s a fundamental problem in that the conveyancers are instrumental in bringing these deals together and writing up the contracts but they can’t actually do some of the work that is necessary to avoid these implications.”
Accountants are seeing these transactions months after they have taken place and then have to go to the ATO to see how they can help their clients manage the penalties.
Accountants need to be proactive in making their clients aware of their opportunities, and Jacobson says they can also be instrumental in the transaction.
“They can assist their clients with applying for the clearance certificates. There is a business opportunity for accountants to provide this service to their clients,” she says.
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