Conveyancing: You may be affected by new Tax Laws
- By Jake Woolford –
Selling a house? Escalating house prices are a big issue in Australia as countless people struggle to afford to buy their own homes. The Federal Government attributes this problem to foreign ownership of real property and has attempted to combat it by introducing new taxes in 2016. Then on 1 July 2017, changes to the scheme came into effect, tightening the laws even further.
Because the scheme applies to Australian residents as well as foreign property owners, it’s important to understand how it works. Here’s what you need to know.
Foreign Resident Capital Gains Tax (FRCGT) and selling a house– How does it work?
From 1 July 2016, the FRCGT scheme came into effect. The aim was to make it easier and more effective for the Government to collect capital gains tax owed by foreign residents.
But the Government decided to cast the net much wider than that. It decided that the scheme would apply to all residential properties that met the criteria, regardless of whether the owners lived within or outside of Australia.
In essence, if any person wanted to sell their Australian residential property, the purchaser of the property would have to withhold ten percent of the purchase price and give it to the Australian Taxation Office (ATO). This meant that the purchaser was paying tax on the seller’s behalf.
If the seller then wanted to claim all or part of that money because they didn’t owe that much in taxation, they would have to lodge an income tax return to get a credit.
These laws applied to residential real estate with a market value of $2 million or more.
But if the seller had a clearance certificate issued by the ATO, the property would be excluded from these requirements. The purchaser only needed to show the certificate to the purchaser and that would be evidence enough that the purchaser could pay the full purchase price to the seller, rather than withholding and remitting ten percent to the ATO.
On 1 July 2017, amendments to the FRCGT scheme came into effect.
Now, the withholding rate has increased from ten percent to 12.5 percent. It applies to properties with a market value of $750,000 or more. This is a significant decrease from the original $2 million threshold and the effect will be that the Government will collect more money on more properties. These changes will apply even for contracts of sale that were entered into before 1 July 2017.
The clearance certificate exemption will continue to apply.
What it means
These changes mean that at the time of settlement (the process in which the property is transferred from the seller to the purchaser), the seller’s conveyancing representative must show the purchaser’s conveyancing representative the clearance certificate. If the seller doesn’t do this, the purchaser is legally required to withhold 12.5 percent of the purchase price and forward it to the ATO.
Once the contract of sale has been signed, a seller should instruct their lawyer or conveyancer to immediately obtain a clearance certificate from the ATO. This should be done as soon as possible because typically it takes the ATO a minimum of 14 days to process the certificate.
These laws have the potential to affect many legal areas. Conveyancing is an obvious one, but they will also impact any situation in which there may be a transfer of residential property. For example, deceased estates, family law cases and even bankruptcy or insolvency proceedings.
Also, because the threshold has reduced to $750,000, a huge amount of properties will now be caught by these requirements. It’s more important than ever to make sure that you get proper legal and accounting advice so that you’re not unfairly penalised in any way. If you consider that 12.5 percent of $750,000 is almost $100,000, you can begin to imagine the impact. If you are relying on every last cent of your property sale to settle on your next home, any withholding of funds can have disastrous consequences. And even if you eventually get a tax refund, if the money’s not available on settlement day, it could derail all of your plans.
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