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Important changes to Capital Gains Tax withholding

As part of the Federal Budget, changes to the Capital Gains Tax (CGT) withholding regime including lowering the threshold of property sales and increasing the withholding rate will apply from 1 July 2017.

The CGT withholding regime was introduced on 1 July 2016 to recover CGT from foreign property owners that would otherwise be lost to Australia’s revenue base. That regime also imposed the same obligation on buyers of property from Australian residents, unless those residents obtained, and produced on or before settlement, a clearance certificate issued by the Australian Taxation Office.

As at 1 July 2016, the clearance certificate requirement was limited to a seller of real property worth $2 million or more and the applicable withholding rate was 10%.

Now as part of the latest Federal Budget, the threshold for property sales has been lowered to $750,000 (exclusive of GST) and the withholding rate increased to 12.5%.

Although forming part of the Federal Budget (which may or may not be passed), the legislation containing this CGT change has already been passed by both Houses of Parliament.

The change will apply to contracts entered into on or after 1 July 2017. The existing regime ($2 million at 10% withholding) will continue to apply to contracts entered into before 1 July 2017, even if they don’t settle until after 1 July.

The application of this CGT regime to transactions involving share transfers in ‘land-rich’ companies or certain acquisitions such as mining, quarrying and prospecting rights, remains the same. There is no monetary threshold for these types of transactions but the withholding percentage also increases to 12.5%.

While the past year has indicated that applying for and obtaining the required CGT clearance certificate is relatively straight-forward, the lowering of the real property price threshold will have the practical result of requiring nearly every seller of real property in Australia to obtain a clearance certificate.

If a buyer is registered for GST, any GST payable under the contract is still excluded from the consideration. Ensuring your buyer is registered for GST becomes particularly important when the purchase price reaches around the $675,000 (GST exclusive) mark.

Until the standard REIQ contracts are updated to address the lowered threshold and increased withholding rate, an appropriate schedule condition should be included in all relevant contracts entered into on or after 1 July 2017. Failure to do so could mean your buyer is in breach of the contract by only paying 87.5% of the purchase price on settlement, or in breach of the law by not withholding, and remitting, 12.5% of the purchase price to the ATO.

If you have any queries or require assistance to deal with the changed Capital Gains Tax withholding regime, please do not hesitate to contact us.

The CGT withholding regime was introduced on 1 July 2016 to recover CGT from foreign property owners that would otherwise be lost to Australia’s revenue base. That regime also imposed the same obligation on buyers of property from Australian residents, unless those residents obtained, and produced on or before settlement, a clearance certificate issued by the Australian Taxation Office.

As at 1 July 2016, the clearance certificate requirement was limited to a seller of real property worth $2 million or more and the applicable withholding rate was 10%.

Now as part of the latest Federal Budget, the threshold for property sales has been lowered to $750,000 (exclusive of GST) and the withholding rate increased to 12.5%.

Although forming part of the Federal Budget (which may or may not be passed), the legislation containing this CGT change has already been passed by both Houses of Parliament.

The change will apply to contracts entered into on or after 1 July 2017. The existing regime ($2 million at 10% withholding) will continue to apply to contracts entered into before 1 July 2017, even if they don’t settle until after 1 July.

The application of this CGT regime to transactions involving share transfers in ‘land-rich’ companies or certain acquisitions such as mining, quarrying and prospecting rights, remains the same. There is no monetary threshold for these types of transactions but the withholding percentage also increases to 12.5%.

While the past year has indicated that applying for and obtaining the required CGT clearance certificate is relatively straight-forward, the lowering of the real property price threshold will have the practical result of requiring nearly every seller of real property in Australia to obtain a clearance certificate.

If a buyer is registered for GST, any GST payable under the contract is still excluded from the consideration. Ensuring your buyer is registered for GST becomes particularly important when the purchase price reaches around the $675,000 (GST exclusive) mark.

Until the standard REIQ contracts are updated to address the lowered threshold and increased withholding rate, an appropriate schedule condition should be included in all relevant contracts entered into on or after 1 July 2017. Failure to do so could mean your buyer is in breach of the contract by only paying 87.5% of the purchase price on settlement, or in breach of the law by not withholding, and remitting, 12.5% of the purchase price to the ATO.

If you have any queries or require assistance to deal with the changed Capital Gains Tax withholding regime, please do not hesitate to contact us.

"The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication."