AUSTRALIAN vendors selling property over $750,000 will now have to provide proof they are not a foreign resident from 1st July 2017.
In 2016, a 10% foreign resident capital gains withholding (FRCGW) tax was introduced. It applied to all real estate transactions over $2 million (AUD) regardless of your residency status. For any property sold over the threshold, vendors had to produce a qualifying clearance certificate from the ATO (at or before settlement) proving they were an Australian resident. Without the certificate, 10% of the sale price was withheld at settlement.
The premise behind this new withholding tax / qualifying clearance certificate process was good – to ensure foreign residents’ capital gains tax obligations were met. And given that the median house price for metropolitan Adelaide is $452,000 (as at March 2017), this change hasn’t affected most residential transactions in South Australia, with the notable exception of high value farming transactions.
But in the recent Federal Budget, the government announced from 1st July 2017 the tax would increase to 12.5% AND that threshold will be lowered from $2 million to $750,000 – a change that will add time and headaches for many more average Australian property owners.
Along with my colleagues, our governing body and real estate industry partners, I was a little baffled by this drop to $750k. Now a much larger number of South Australians will be impacted by the requirement to obtain a qualifying clearance certificate, and let’s also spare a thought for our fellow Australians on the eastern seaboard, our farmers and large land holders!!
With median house prices in Sydney at $1,151,565 and Melbourne at $826,000.00, the lower threshold means that in these areas, almost every property sale will see Vendors having to apply for a qualifying clearance certificate – regardless of their residency status!!
At Marshalls, our most recent large farming transaction saw the Vendor obtain their qualifying clearance certificate within 48 hours, but the ATO states they can take up to 28 days to produce. And, with almost every property transaction in capital cities of the eastern states now requiring a qualifying clearance certificate, we can expect the demand on the ATO for qualifying clearance certificate to quadruple.
It’s true that most large deals don’t have 28-day settlements, but for the average house sale they are common place. Conveyancers are already required to produce a huge amount of legal paperwork, working through all the red tape to ensure best practice, but it is becoming a heavy burden to meet all the administration requirements for the State and Federal government – and with this change in legislation, the burden on Conveyancers will become heavier still.
I can only hope the ATO has also considered the impact this change will have on their own team, and will increase their staff numbers to cater for it.
Now more than ever, the need for Vendors, Real Estate Agents and Conveyancers to work together is crucial. Time frames must be established – there is no point having a 28-day settlement if the Vendor cannot obtain a qualifying clearance certificate in time to meet the settlement date! If you are selling at auction you will really need to consider the impact this legislation has on you.
As Conveyancers, we know we are always asking for countless pieces of information and seemingly endless pieces of paperwork – we know it’s frustrating but please remember we are batting on your team!