Changes to foreign resident capital gains withholding payments system

On 9 May 2017 as part of the 2017-2018 Federal Budget, the Government announced two changes to the system whereby a purchaser is required to withhold an amount (currently 10%) of the purchase price from the seller and pay the amount withheld to the ATO as part of the settlement process when selling or buying real property or interests in real property in Australia.

The changes announced are to the threshold and the withholding payment rate, and will apply to any contracts of sale entered into on or after 1 July 2017. However, the current threshold and withholding payment tax rate will apply for any contracts which are entered into prior to 1 July 2017, regardless of whether they settle after that date.

Background

The system was implemented on 1 July 2016 and applies to both foreign and Australian residents. It is aimed at the collection of capital gains tax from foreign residents, therefore, there are exceptions for sellers who are not foreign residents, subject to the parties following the correct process, such as obtaining a clearance certificate from the ATO prior to settlement.

The changes

The changes applying from 1 July 2017 are as follows:

  • the threshold is reduced from $2million to $750,000 and the system will now apply to all real property disposals where the market value of the property is $750,000 and above; and
  • the withholding payment rate will be increased to 12.5% (from the the current rate of 10%).