Having lived in Australia all your life (for those of you who were born overseas like myself, most of your life), have you ever thought the taxation office would treat you as a “foreign resident” one day?

Don’t think so? Wait until you try to sell a property that is worth more than $2 million.

According to rules for the Foreign resident capital gains withholding payments, all vendors who sell any of the following with a market value over $2 million is considered a “relevant foreign resident”.

  1. Real property situated in Australia (including leases)
  2. Mining, quarrying or prospecting rights in relation to minerals, petroleum or quarry materials situated in Australia (to the extent those rights are not real property)
  3. Shares in a company that owns land or a building, where the ownership of the shares gives a right to occupy that land or building (i.e. indirect Australian real property)

When the vendor is a “relevant foreign resident”, the purchaser will need to withhold 10% of the total price on the property and pay that to the taxation office – unless the vendor can provide the purchaser a “Clearance Certificate” from the taxation office on or before the settlement of the transaction.

Note the responsibility to withhold is on the purchaser, so if the vendor could not provide the “Clearance Certificate”, the purchaser will have no choice but to pay the 10% of the total price to the taxation office on settlement.

The clearance certificate application is not overly complex and it can be completed by the vendor’s representative – however, the representative might not be able to answer all the questions for the vendor as answers to some of the questions in the application might be treated as tax advice according to the taxation office. In those cases, the representative will need to relay these questions to the vendor or the vendor’s accountant.

Some potential traps on the clearance certificate application:

  1. The name on the certificate do need to match with what’s on the title.
  2. One of the questions on the application form is “Lodgement of tax returns for the last two years”. My personal opinion: the taxation office “might” hold up the clearance certificate if the vendor has any overdue tax return lodgements.

On a side note, the person who thought of this in the taxation office must be a genius - as from 1 July 2016:

  1. All Australian taxpayers will have to “report” to the taxation office when they are selling a property that is worth more than $2 million, which means free data for the audit department.
  2. Anyone who is selling a property that is worth more than $2 million is very likely to ensure they have any outstanding tax returns lodged. Lodgement statistics will go up!