WHAT IS FRCGW AND WHO DOES IT EFFECT?
In 2016 a foreign resident capital gains withholding (FRCGW) was introduced and applied to real estate transactions over $2 million. A 10% capital gains withholding tax was required to be withheld by the purchaser, regardless of the vendor’s residency status, unless a qualifying clearance certificate was produced prior to settlement proving that they were not a foreign resident. This affected very few transactions and rarely needed to be dealt with.
FRCGW COMPLIANCE LAWS
As of 1 July 2017, this changed, and the government introduced new criteria in the Federal Budget. Now all vendors selling property over $750,000 will now have to provide proof they are not a foreign resident. The FRCGW tax rate has also increased to 12.5%. This is achieved by applying for the clearance certificate online from the Australian Taxation Office (ATO) and must be initiated early enough so that settlement can take place on time.
This change affects a larger number of transactions and these vendors and their conveyancers need to spend more time ensuring that they have complied with these rules.
There has been some past confusion in the industry as to who is actually required to apply for these clearance certificates. On the surface, it sounds like only foreign residents need to supply this information, however, this is not the case. Regardless of whether you are an Australian citizen or a foreign resident, ALL vendors must apply for the clearance certificate if the sale of the property is for $750,000 and more
HOW WILL THIS AFFECT YOU?
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.
Without being presented with a valid clearance certificate, the purchaser will be required to remit 12.5% of the purchase price to us if no other exclusions apply.
The time for the vendors to obtain their qualifying clearance certificate can be quite quick however the ATO states they could take up to 28 days to produce. With the extra demand we are currently experiencing, this is something that should be initiated very early in the transaction. In South Australia, many contracts are signed with a 30 to 45 day settlement in mind.
As an industry it is so important that vendors, purchasers, real estate agents, financiers and conveyancers work together to ensure that the contract has a settlement date that is realistic, so that the transaction can be settled on time. It is also more important than ever that any potential buyer and seller see a conveyancer before they sign a contract.
WHAT DO YOU NEED TO DO?
As soon as you have a contract in place and even beforehand you can apply for the clearance certificate online. The certificate is valid for up to 12 months so an be used for any sale during that period.
The link to apply for the certificate is as follows:
Bear in mind that you need to apply for the certificate in the correct name. The vendor can be a person, a company, an executor of an estate and other entities so ask the question of what you need to do if you are unsure.
It is also best to have your tax file number as the applications get processed quicker if this is provided and getting the certificate sent to an email address is also the best and quickest way to receive it. You can then provide this certificate to your conveyancer in readiness for settlement. Remember if you are in any way unsure of the process your conveyancer can assist.
As an industry it is so important that Vendors, Purchasers, Real Estate Agents and Conveyancers work together to ensure that the contract has a settlement date that is realistic so that the transaction can be settled on time. It is also more important than ever that any potential buyer and seller see a conveyancer BEFORE they sign a contract.
The team at McKay Business Services are all members of the AICSA and are proud Adelaide conveyancers