Did you know if you are selling a property for over $750,000 or more, you must apply and be eligible for a clearance certificate?
What is Clearance Certificate means?
A clearance certificate provides certainty to purchasers regarding their withholding obligations. It confirms the withholding tax is not applicable to the transaction.
The purchaser must withhold 12.5% of the purchase price in transactions involving taxable Australian real property, or an indirect Australian real property interest that provides company title interests, with a market value of $750,000 or more,
Unless the vendor shows the purchaser a clearance certificate from Australian Tax Office (ATO)
It is the vendor’s responsibility to obtain the clearance certificate and provide it to the purchaser at or before settlement.
To avoid unanticipated delays, and to ensure the certificate is valid at the time it is given to the purchaser, vendors seeking a clearance certificate should apply through the online form as early as practical in the sale process.
When you sell property and don’t have a valid clearance certificate at or before settlement, the purchaser must withhold 12.5% of the purchase price.
This is the foreign resident capital gains withholding (FRCGW) amount.
The affected properties include:
- Vacant land
- Buildings
- Residential and commercial property.
Did you know conveyancers, real estate agents and other persons charging a fee for services can’t complete the form on behalf of the vendor unless they are a legal practitioner or registered tax agent like us?
Where there are multiple Australian resident vendors disposing of the asset, each vendor should apply for a separate clearance certificate in their name only.
Australian residents not required to lodge tax returns, such as aged pensioners, are still required to obtain a clearance certificate.
If you are a foreign resident there is no point in you lodging an application.
However if you may be entitled to a variation to the withholding rate, then you can lodge a variation request.
When to get a clearance certificate for selling real property over $750k?
If you are selling a selling property you should lodge your application for a clearance certificate as early as you can.
Clearance certificates are current for 12 months and can be used for multiple sales.
Sellers must provide a certificate before settlement and it can take up to 28 days for processing.
The vendor will have to provide the purchaser with an ATO issued clearance certificate on or before the day of settlement of the sale of the asset to ensure no withholding occurs.
Who can complete and lodge?
A clearance certificate application form should be completed and lodged by Australian resident vendors who don’t wish to have an amount withheld by purchasers.
Where a purchaser acquires an asset through a sale or transfer, the vendors are the individuals and/or companies that have legal title to the asset prior to the sale or transfer.
Where the vendor of the asset is the trustee of a trust (for example, an executor of a deceased estate or a trustee of a superannuation fund) it is the trustee that applies for the clearance certificate.
The trustee should apply for the clearance certificate using (as the identifier) either their:
- Own tax file number (TFN) – for an individual
- Australian business number (ABN) – for a company.
Note: If a corporate trustee does not have a TFN, include an attachment in the application which provides the details of the relevant trust and the company’s Australian company number (ACN).
Where a purchaser acquires an asset that has been granted (such as a lease), the vendors are the grantors of the asset.
Vendors may either complete and lodge the form themselves, or have it completed and lodged on their behalf by a third party (for example, a solicitor, an accountant, or a tax agent).
Please be take note, conveyancers, real estate agents and other persons charging a fee for services can’t complete the form on behalf of the vendor unless they are a legal practitioner or registered tax agent like us?
What happens when there isn’t a clearance certificate?
The purchaser must withhold the 12.5% of the purchase price and remit it to ATO (the seller will likely want to delay settlement until they have a certificate).
If it’s a new residential property that’s subject to GST at settlement, the purchaser must also withhold the GST amount and remit it to ATO with Form two, GST property settlement date confirmation.
The purchaser pays the sale price, minus any withheld amounts to the seller.
The two withholding obligations occur separately but operate together.
If the settlement date changes, you don’t need to resubmit Form one: GST property settlement withholding notification, just make sure the new settlement date is entered when lodging Form two.
Without being presented with a valid clearance certificate, the purchaser will be required to remit 12.5% of the purchase price to ATO if no other exclusions apply.
What are the excluded assets from Capital Gains withholding to Australian residents?
Some assets are not subject to the withholding, including:
- Taxable Australian real property with a market value of less than $750,000
- An indirect Australian real property interest providing a company title interest with a market value of less than $750,000
- Transactions conducted through an approved stock exchange
- Transactions conducted using a broker-operated crossing system, such as a ‘dark pool’, as described in the ASIC Market Integrity Rules (ASX Market) 2010
- Transactions subject to another withholding obligation
- Securities lending arrangements, as these don’t trigger a CGT liability for the vendor and therefore no payment obligation is imposed
- Transactions where the vendor is in external administration or transactions arising from the administration of a bankrupt estate, a composition or scheme of arrangement, a debt agreement, a personal insolvency agreement, or same or similar circumstances under a foreign law.
Paying the withholding
A purchaser must pay ATO the withholding equal to 12.5% of the first element of the CGT asset’s cost base (the cost base is generally equal to the purchase price).
Where no money is paid or required to be paid, or the agreed amount is under market value, then the 12.5% withholding is on the market value of the CGT asset.
The purchaser is liable to withhold and pay this amount. If this does not occur when it should, ATO will hold the purchaser liable.
When the payment is required?
To pay the withholding to ATO, the purchaser must complete an online form.
Where there are multiple purchasers one form can be used if there are 10 or fewer purchasers, or purchasers can lodge a form individually.
Once a payment notification form is processed, a payment reference number (PRN) will be issued, along with a PDF icon that can be clicked on to obtain a downloadable payment slip and barcode to use at Australia Post.
Only one PRN is issued per purchaser payment notification form, even if multiple purchasers are supplied on the form.
The purchaser (or purchasers) must pay the withholding to ATO on or before the day they become the owner of the asset, and they require the PRN, payment slip and barcode to do this.
Without these, the purchaser will not be able to make the payment at Australia Post.
ATO encourage purchasers to submit the payment notification form as early as possible, to ensure they have the payment reference number at settlement.
If the purchaser fails to obtain a PRN and pay the withholding when they become the owner of the asset, general interest charges will be imposed.
There is a short grace period from, and including the day of settlement, for the withholding to be paid in full.
General interest charges will accrue from the date of settlement if ATO doesn’t receive the withholding within the grace period.
All parties should view the Purchaser payment notification form before settlement proceeds and should contact ATO if there are changes to the settlement date on the form.
What happens if you had a withholding taken from your sale proceeds?
If an Australian tax resident vendor has had withholding taken from their sale proceeds, for example because they didn’t provide the purchaser with a clearance certificate, they will be able to claim a credit for that amount when they lodge their tax return.
This credit may be refunded if they don’t have to pay capital gains tax on the sale of the property (for example, because it was their main residence).
Only an Australian resident entity* can obtain a clearance certificate. Solicitors, tax agents or other representatives of the vendor can apply on the vendor’s behalf.
*An Australian resident entity is one that is an Australian resident for tax purposes.
This isn’t the same as the definition of residency for immigration purposes, or for the Foreign Investment Review Board (FIRB) applications to buy Australian property.
A clearance certificate only applies to the entity specified on the certificate.
If an asset has multiple vendors, each vendor will need to show the purchaser a clearance certificate to ensure amounts are not withheld.
It’s valid for 12 months from the date issued, so the vendor may be able to use it for multiple disposals of real property that occur within the 12 month period.
The vendor doesn’t have to reapply to ATO each time they dispose of a property.
What is the contract is for longer than 12 months?
There may be instances where the settlement date is after the expiry date on the vendor’s clearance certificate.
For example, where an off-the-plan apartment is acquired and the contract period is greater than 12 months.
The purchaser may rely on the clearance certificate being valid as long as the date it’s made available to the purchaser, is within the clearance certificate period stated on the certificate.
It may be provided to the purchaser at any time during the transaction, but must be provided to the purchaser by settlement.
Situations involving mortgagors and mortgagees
This concerns situations where a mortgagor (borrower) has borrowed funds from a mortgagee (creditor, for example a bank), that mortgagor is unable to repay the loan and the mortgagee requires them to sell the secured asset which is subject to withholding (referred to as property in this section).
There are three situations where this commonly applies:
- Situation 1 – the mortgagor retains title to the sale as the mortgagee has not repossessed the title to the property but has ordered its sale.
- Situation 2 – where the mortgagee does take possession of the property and sells in that capacity, but there is no transfer of title from mortgagor to mortgagee.
- Situation 3 – the mortgagee has repossessed and taken title to the property from the mortgagor.
This is commonly known as a foreclosure. In this situation there are two transactions where foreign resident capital gains withholding may apply
- The transaction concerning the transfer of title from the mortgagor to the mortgagee (generally deemed to be a sale of the property at market value)
- The transaction concerning the transfer of title from the mortgagor to the mortgagee (generally deemed to be a sale of the property at market value)
Applying for the clearance certificate or vendor variation
The entity with the title to the property is required to obtain the clearance certificate so foreign resident capital gains withholding won’t apply.
In situation 1, the mortgagor remains the legal owner of the property.
Therefore it is the mortgagor who has to obtain the clearance certificate and ensure it is provided to the ultimate purchaser for foreign resident capital gains withholding not to apply.
In the event the mortgagor doesn’t cooperate with the mortgagee, then the mortgagee, as a creditor, can apply for a foreign resident capital gains variation to have the withholding reduced to the extent that the amount it is owed would not be covered by the sale proceeds if an amount was withheld.
In situation 2, the mortgagee cannot obtain a clearance certificate as they are not the legal owner of the property.
However, the mortgagee can apply for a foreign resident capital gains variation to have the withholding reduced to the extent that the amount it is owed would not be covered by the sale proceeds if an amount was withheld.
There is no specific requirement as to who physically provides the clearance certificate to the purchaser.
Therefore, with both situation 1 and 2, if the mortgagor, as vendor, obtains the clearance certificate, then provides it to the mortgagee, and the mortgagee provides it to the purchaser the ultimate purchaser can verify that the clearance certificate issued to the vendor is valid so long as it matches the name on the certificate of title.
In situation 3, for foreign resident capital gains withholding not to apply, clearance certificates are required to be provided to the purchasers for both transactions, that is:
- Repossession by the mortgagee from the mortgagor. The mortgagor, as the vendor, is the party that has title of the property and therefore would obtain the clearance certificate. As in situation 1, if the mortgagor doesn’t co-operate in this regard, the mortgagee, as a creditor, can apply for a foreign resident capital gains variation
- Sale of the property by the mortgagee to the ultimate purchaser. As the mortgagee has title to the property it is mortgagee that would obtain the clearance certificate.