On July 1st 2017, changes to legislation limited capital gains tax exemptions availability to foreign and temporary residences and increase withholding tax for foreign tax residents. This will impact a lot of people as Peter Maloney from GlobalX explains.
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Kevin: There’s a legislative change that I want to mention to you that’s going to have impact, I think, right across… Whether you’re a buyer or a seller, whether you’re a real estate agent, whether you’re a lawyer or a conveyance, it’s going to impact a lot of people.
…A legislative change to give lawyers and conveyancers extended powers as they take on the role of tax collector during the property settlement process. From July 1, the changes to legislation will limit capital gains tax exemptions availability to foreign and temporary residences and increase withholding tax for foreign tax residents.
I’m going to get a further explanation on this and its impact because there’s been another change. Peter Maloney joins me, who is the CEO for GlobalX.
Peter, thanks for your time.
Peter: It’s great to be with you again, Kevin.
Kevin: I know you’ve put a warning out on this, and it sort of snuck up on me. I didn’t realize that this threshold had been lowered from $2 million down to $750,000. When does this take effect?
Peter: It comes into effect as part of the federal government’s most recent Budget, from July 1st this year.
Kevin: Okay. Explain to me what is going to happen. What does it all mean?
Peter: It’s been pretty silent up until now. In the prior year’s Budget, the federal government introduced a foreign resident capital gains withholding tax and applied that to all properties sold with a value greater than $2 million.
What the government called for was for all vendors selling a property greater than $2 million to apply to ATO for what’s known as a clearance certificate, in essence, demonstrating that they are an Australian resident. If the person could not demonstrate Australian residency, the purchaser’s solicitor was obliged to withhold 10% of the transaction value – so the value of the property – and remit those funds to the ATO within one working day.
What the federal government has done in the current Budget is quite dramatic. Under the old model, only 11% of Australian properties were sold with a value greater than $2 million. The federal government has now elected to drop that threshold down to $750,000, and it is a staggering, now, 68% of all Australian properties. 68% of Australian vendors must now apply to the ATO for a clearance certificate to prevent themselves from having 12.5% of that property value withheld and passed on to the ATO.
Kevin: So, is the requirement to get these clearance certificates… And I’ll ask a few more technical questions about that in just a moment. What’s involved in getting one of those certificates? How long does it take?
Peter: You can do that online. The ATO has a website online for the application of a clearance certificate. It’s an online form, the consumer or their representatives will fill that out, and the estimated turnaround time from the ATO, if there are no questions regarding the data on the form, is three to five days.
Kevin: Is there a cost involved in getting one of those certificates?
Peter: No, the ATO doesn’t charge for the issue of the certificate.
Kevin: Unless you’re doing it through a solicitor, I guess, and they’d probably some sort of administrative charge.
Peter: Well, that’s right and there’s a bit of a trick to that. Because under this regime, if property lawyers or solicitors or conveyancers are acting as the recipient of the tax to pass it to the ATO, they technically fall under the Tax Agent Services Act and cannot charge a fee for that process.
Kevin: Okay. That’s in the event that they have to claw back this 12.5% we’re talking about?
Peter: That’s right.
But it’s dramatic, Kevin. Last year, under the current regime at $2 million, there were 30,000 applications for a clearance certificate. From July 1st and in the forward looking year, that number will jump to 400,000.
Kevin: This is an administrative nightmare. You’re talking there about the turnaround of these certificates being three to five days; I can see that blowing out to be anything up to two to four weeks, at the best.
Peter: Last time we spoke, Kevin, we spoke about the great things that were going on in digitalization of the property settlement process with electronic conveyancing. Now this just flies into the face of that process where the whole economy is looking to digitalize, but now we have a processing place that requires paper to come back in to the property settlement process.
Kevin: Now, I understand in the release you put out, you were talking there about lawyers and conveyancers having to get involved in this process. And of course, they will be ultimate collectors of this tax, if it applies. But the issuing of the clearance certificate, surely that’s going to come back to agent at the point of listing. Do they have a duty of care to tell their seller?
Peter: That’s right. So, the solicitor has the obligation to withhold the funds and remit the funds to the ATO. But I don’t disagree with you, Kevin; for the process to work smoothly, if the listing agent advises their customer at the time of listing that the value of the property may exceed $750,000, it would be in the best interest of both the real estate agent and the consumer to have that notification and apply for the clearance certificate sooner rather than later.
Kevin: Can you see a time when the clearance certificate is just going to be part of the listing process, no matter the value of the property? It’ll just become part of the process. Is there any reason why that can’t happen?
Peter: There is no reason why that can’t happen at all. Absolutely no reason at all, Kevin. And it’s probably a very wise recommendation.
Kevin: We’ll certainly carry this across all of our audiences because I think everyone needs to know that this is actually applying, as from July 1st.
Peter, any other points you wanted to make before we close off?
Peter: Really, just for your listeners to be aware. We looked at last weekend’s auction results around Australia, and of all the properties that were sold in Brisbane, 88% of those would have required a clearance certificate. Under the old regime, it would have only been three properties.
Kevin: And what about, say, Sydney and Melbourne? It would be even more acute, wouldn’t it?
Peter: The largest high sold property last week was a $3 million residence in Dicky Beach. Now, we have every suburb of Brisbane being affected.
The numbers on Sydney were 400 out of 453 properties would have been affected. In Melbourne, it was 61%, ACT 52%, and Adelaide 53%.
There are other complications as well, Kevin. Imagine a family who is trying to sell the property on behalf of their deceased mother, at 92 years old, who had never worked, never had a tax file number, doesn’t have a record at the ATO. We would question how is the ATO going to issue a clearance certificate if that person is unknown to them?
Kevin: Yes, great question. Lots of questions, and only the passage of time is going to be able to help us answer some of those. But Peter, thank you for raising this with us. It’s timely that we would be looking at it right now.
Peter Maloney from GlobalX, thank you very much for your time.
Peter: Great to be with you, Kevin.
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Originally published as: https://realestatetalk.com.au/you-need-to-prove-you-are-not-a-foreigner-peter-maloney/
Kevin Tuner worked in radio as General Manager of various east coast radio stations. He started in real estate in 1988 and was ranked in the Top 10 Salespeople in the state until he was appointed as State CEO 1992.
He operated a number of real estate offices as business owner and was General Manager of several real estate offices in Christchurch.
He now hosts a real estate show on Radio 4BC and a weekly podcast at www.realestatetalk.com.au. He is the host of a daily 7 to 10 minute podcast show for real estate professionals at www.reuncut.com.au.
To hear more podcasts by Kevin Turner, click here
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