If you’re an Australian expat thinking about selling property in Australia, you’ve probably already got a million things to think about (choosing an agent, agent fees, preparing a house for sale – the list goes on!) let alone the cost of capital gains withholding. But the reality is, without some careful planning, your returns could be cut by up to 12.5% at settlement thanks to foreign resident capital gains withholding.
Here are some of the key things to consider and what you can do to cut down on costs.
What is capital gains withholding?
Foreign resident capital gains withholding applies to anyone who isn’t an Australian resident, who is disposing of certain taxable assets (like property in Australia) where the sale price is over $750,000.
Simply put, if you aren’t an Australian resident for tax purposes (i.e. you don’t have to pay tax in Australia on non-Australian sourced income), you can expect to incur a capital gains withholding cost equal to 12.5% of the sale price (that’s $93,000 on a $750,000 property).
Capital gains withholding is designed to ensure foreign residents pay any tax liabilities associated with the sale of Australian property and other taxable assets. Technically speaking, capital gains withholding is not a tax, but a pre-payment to the ATO of any potential capital gains tax liability.
How to get a clearance certificate to avoid capital gains withholding
If you’re an Australian resident when you sell a property, you can request a clearance certificate from the ATO at least 14 days prior to selling to ensure the buyer doesn’t need to keep the withholding amount – meaning you don’t have to pay.
According to the ATO website, around half of applications for clearance certificates are processed automatically within days, whilst the remainder of applications can take between 14 and 28 days (and sometimes longer for unusual or higher risk cases). The ATO also won’t accelerate the processing of your application just because your settlement date is approaching – so it’s best to get your request in as early as possible.
On the other hand, if you’re a foreign resident when you sell an Australian property, you’ll need to lodge an Australian tax return at the end of the financial year and claim a tax credit for any capital gains withholding paid. If you don’t have to pay capital gains tax (such as if the property sold is your main residence), your credit should be refunded when your return is processed.
Reducing the capital gains withholding rate
If you are not an Australian resident for tax purposes (and therefore not eligible for a clearance certificate), you may be able to request a variation on the withholding rate and reduce the amount payable.
Some of the reasons for requesting a variation could include:
- You won’t make a capital gain on the sale of your property (i.e. you are selling the property at a loss)
- You won’t have an income tax liability (if you have carried forward tax losses, for example)
If the property was your principal place of residence, the capital gain on the property may be exempt from capital gains tax. However, changes introduced in the 2017 Federal Budget removed the capital gains tax exemption for foreign residents (including Australian expats). Head to the ATO website for more information.
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Disclaimer : This information is for educational purposes only and does not constitute financial or taxation advice. As this information is not advice and has been prepared without taking into account your objectives, financial situation or needs you should, before acting on this information, consider its appropriateness for your circumstances. Independent advice should be obtained from an Australian financial services licensee before making investment decisions, and a registered (tax) financial advisor/accountant in relation to taxation decisions. To the extent permitted by law, we exclude all liability for any loss or damage arising in any way.