PHOTO: REIA
Major Legislative Change: ATO Clearance Certificate Now Required for Australian Property Sales
Effective January 1, 2025, all Australian residents selling property must obtain a clearance certificate from the Australian Taxation Office (ATO). This is a significant update to the foreign resident capital gains withholding (FRCGW) rules and has implications for sellers nationwide. Failing to secure this certificate could result in 15% of the property sale price being withheld by the ATO—a potentially costly oversight.
This development represents a shift in how property transactions are handled, aiming to ensure compliance with tax obligations. Here’s what sellers need to know about this new regulation, how it works, and the steps required to avoid penalties.
Understanding the FRCGW and Its Purpose
The FRCGW regime was introduced to ensure that foreign residents selling property in Australia meet their capital gains tax obligations before transferring sale proceeds offshore. Previously applicable only to properties valued at $750,000 or more, the updated legislation now applies to all property transactions, regardless of value.
The rule mandates that a portion of the sale price be withheld by the buyer and remitted to the ATO if the seller cannot provide a clearance certificate. This withheld amount is then reconciled when the seller lodges their tax return.
While Australian citizens and residents are generally exempt from withholding, the clearance certificate is now a non-negotiable requirement to prove residency status and avoid the 15% withholding.
Key Implications for Australian Property Sellers
1. Clearance Certificates Are Now Mandatory
Under the updated rules, all property sales contracts signed from January 1, 2025, require sellers to present a clearance certificate from the ATO. Failure to do so obligates the buyer to withhold 15% of the sale price and remit it directly to the tax office.
2. No Threshold Exemptions
Previously, the withholding applied only to properties sold for $750,000 or more. This threshold has been removed, making the legislation applicable to all property transactions, whether the property is worth $50,000 or $5 million.
3. Streamlined Online Application Process
Obtaining a clearance certificate is a straightforward process conducted online through the ATO website. Sellers are advised to apply as early as possible. Certificates are valid for 12 months, allowing flexibility to secure one well before accepting an offer.
How to Apply for a Clearance Certificate
Sellers must follow these steps to secure a clearance certificate:
- Visit the ATO Website
Access the online application portal for clearance certificates. - Provide Required Information
Submit necessary details, including your tax file number (TFN), property details, and proof of Australian residency. - Await Processing
Most certificates are issued within a few business days. However, delays of up to 28 days may occur if the seller has outstanding tax returns or unresolved ATO matters. - Submit the Certificate to the Buyer
Provide the certificate to the purchaser at or before settlement to avoid withholding penalties.
What Happens if You Fail to Obtain a Certificate?
Failing to provide a clearance certificate can result in significant financial consequences:
- Withholding by the Buyer
The buyer is legally required to withhold 15% of the purchase price and transfer it to the ATO. - Delayed Refunds
Any withheld amount can only be refunded (if eligible) after the seller files their income tax return and the ATO processes it. This could mean waiting until the next tax time to access those funds.
Proactive Steps for Sellers
To avoid complications, sellers should:
- Apply Early
Clearance certificates are valid for a year, so there’s no need to wait until you find a buyer. - Ensure Tax Compliance
Outstanding tax returns or unresolved ATO issues can delay processing. Address these matters promptly to avoid delays. - Inform Buyers of Compliance
Communicate with potential buyers and their legal representatives about the clearance certificate to facilitate a smooth transaction process.
Why This Change Matters
The updated FRCGW rules ensure that foreign residents pay their fair share of taxes before property sale proceeds leave Australia. While the primary focus is on foreign sellers, the legislation indirectly impacts Australian residents by enforcing the clearance certificate requirement. This measure ensures transparency and efficiency in property transactions, protecting Australia’s tax base.
Final Thoughts
For Australian property sellers, the new ATO clearance certificate requirement represents a crucial step in ensuring compliance with tax regulations. With the potential to lose 15% of the sale price temporarily, it’s imperative to act early, secure the necessary documentation, and avoid unnecessary complications.
The takeaway? Plan ahead, stay compliant, and ensure your property sale proceeds without a hitch.
For more information or to start your application, visit the official ATO Clearance Certificate Portal.
SOURCE: REIWA