From January 1, 2025, if you are selling any type of property in Australia and fail to present a clearance certificate, the buyer must withhold 15 per cent of the sale amount. The withheld money is then sent to the ATO. You can only claim it back when you lodge your next tax return (assuming you have no outstanding debts and are entitled to a refund).
Why the change?
Previously, sellers had to get a clearance certificate only if the property was valued at $750,000 or above, and the withholding rate for non-residents was 12.5 per cent. Under the new rules:
1. The $750,000 threshold is no longer applicable.
2. The withholding rate has increased from 12.5 per cent to 15 per cent.
The aim is to ensure that foreign owners meet their Australian tax obligations when selling property. However, these requirements now apply to all Aussie sellers, too. If you cannot prove your residency status through a clearance certificate, you risk a significant portion of your proceeds being withheld.
What happens if you don’t get a clearance certificate?
If you do not secure a clearance certificate:
The buyer must withhold 15 per cent of your property’s sale price.
– You will not have access to that money until you file your tax return and receive any applicable refund.
Given Australia’s property prices, 15 per cent can amount to hundreds of thousands of dollars. For instance, if you sell a property at $800,000, having $120,000 withheld can pose a major cash flow challenge.
Examples: Understanding the real-impact
Example 1: Investment Property Under $750,000
Scenario
– Mark and Sarah own an investment property selling for $650,000.
Before January 1, 2025: Because the property’s value is under $750,000, they would have not needed a clearance certificate.
– Now: The threshold is gone, so if Mark and Sarah don’t get a clearance certificate, the buyer must withhold 15% of $650,000, which is $97,500. They can only reclaim that money when they lodge their tax return.
Example 2: Investment Apartment Over $750,000
Scenario
– Priya decides to sell her investment apartment in Sydney for $900,000.
– Before January 1, 2025: Priya needed a clearance certificate if the property was over $750,000, but the withholding rate was 12.5% (which would have been $112,500).
– Now: Without a clearance certificate, the buyer withholds 15%, or $135,000. This represents an additional $22,500 withheld compared to the old system.
Example 3: Preparing Early for a Sale
Scenario
– Emily and Daniel plan to sell their holiday home in July 2025.
– They choose to apply for a clearance certificate in January 2025, several months before listing.
– Because it’s valid for 12 months, the certificate will cover them even if the sale occurs later in the year.
How to obtain a clearance certificate
Applying for and receiving a clearance certificate is free and relatively straightforward:
1. Apply Through the ATO Website
o Head to ato.gov.au and search for “Clearance certificate application” or “Capital gains withholding clearance certificate.”
2. Provide Your Details
o You’ll need to supply basic information such as your name, Tax File Number (TFN), and the relevant property details.
3. Processing Time
o Most applications are issued within a few days, but in more complex cases, it may take up to 28 days.
4. Certificate Validity
o A clearance certificate typically remains valid for 12 months. You do not need a new one if you sell another property during this period, as long as the name of the legal owner remains the same.
Key takeaways for property investment owners
1. Plan Ahead
o If you expect to sell an investment property in the next 12 months, apply for your clearance certificate as soon as possible to avoid potential delays and financial pitfalls.
2. Factor in Higher Withholding
o Withholding has increased from 12.5% to 15%. Even if you’re a resident, failing to provide a clearance certificate means you’ll face this higher rate until you file your tax return.
3. Don’t Assume an Exemption
o The old $750,000 threshold is gone. Now, all property transactions require either a clearance certificate or the 15% withholding – this applies to both smaller properties and million-dollar deals.
4. Collaborate With Professionals
o Your solicitor, conveyancer, or tax professional can guide you through the certificate application process, ensuring everything is in order before settlement.
5. Stay Current with ATO Updates
o Tax rules evolve over time. Keep an eye on reputable sources such as the ATO, your state’s Land Registry, or real estate institutes to ensure you have the latest information.
Australia’s updated foreign resident capital gains withholding (FRCGW) rules significantly broaden the net by removing the $750,000 threshold and raising the withholding rate to 15%. This shift means all sellers must demonstrate their residency status or risk losing a considerable chunk of their sale proceeds until the next tax return.
Given how simple and free it is to obtain a clearance certificate, the safest route is to apply well in advance of listing your property. For further details, visit the ATO’s official FRCGW webpage or consult a registered tax agent, solicitor, or accountant for advice tailored to your situation. By staying informed and prepared, you’ll safeguard your cash flow and keep your property transactions running smoothly under these new regulations.