When Australian residents (for tax purposes) sell property valued at $750,000 or more and don’t provide a clearance certificate by settlement, 12.5% of the property purchase price must be withheld by the purchaser and paid to the ATO. This is known as the Foreign Resident Capital Gains Withholding (FRCGW) amount.
To avoid this withholding, Australian residents must obtain a ‘clearance certificate’ to prove they are not foreign residents. It is the vendor’s responsibility to secure the clearance certificate and provide it to the purchaser at or before settlement. To prevent any unforeseen delays and ensure the certificate is valid when presented to the purchaser, vendors should apply for the clearance certificate through the online form as early as possible in the sale process.
The main reasons a clearance certificate hasn’t been obtained before the settlement date are because clients:
- Don’t allow enough time to make an application before settlement (the standard processing time is 28 days).
- Have tax records that aren’t up to date.
- Haven’t needed to lodge tax returns for several years (e.g., when returns were not necessary).
If this happens to you, you must lodge a tax return to claim the credit that was withheld, even if your income is below the threshold to lodge. Obtain the ‘payment confirmation’ from the purchaser. When completing the tax return, be sure to:
- Declare your Australian assessable income, including any capital gain or loss from the disposal of the asset.
- Claim a ‘Credit for foreign resident capital gains withholding amounts’ taken from the sale proceeds.
The withheld amount will be refunded in full if:
- There are no tax debts.
- There’s no CGT payable on the sale of the property.
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