Changes to ATO Clearance Certificates

The Australian Taxation Office (ATO) has introduced changes to Clearance Certificate requirements for property sales, effective from 1 January 2025. These changes impact all Australian residents (for tax purposes) who are selling or disposing of real property.

To ensure compliance, sellers must obtain an ATO Clearance Certificate and provide it to the buyer at or before settlement. If the seller does not provide this certificate, the buyer or lessee may be required to withhold part of the purchase price and pay it to the ATO. These rules are designed to ensure that foreign residents meet their capital gains tax obligations when selling Australian property.

Previous Requirements for Foreign Resident Capital Gains Withholding

The FRCGW rules were introduced on 1 July 2016 and applied to property transactions valued at $750,000 or more. These rules applied to various property dealings, including:

• Vacant land.
• Residential and commercial properties.
• Certain leases over real property.
• Other transactions involving Australian property.

In respect to the sale or transfer of property, FRCGW applies unless the seller could prove they were an Australian resident for tax purposes. To do this, sellers had to provide from the ATO either:

• a clearance certificate for an Australian resident; or
• a variation notice for a foreign resident.

If neither document was provided, buyers were required to withhold 12.5% of the purchase price and pay it to the ATO.

Changes Effective from 1 January 2025

The ATO has updated the FRCGW requirements to address concerns that the previous withholding rate did not adequately reflect capital gains tax obligations for foreign residents. As a result, the following changes have been introduced:

• The threshold has been reduced from $750,000 to $0, meaning all property sales, regardless of value, are now subject to withholding.
• The withholding rate has increased from 12.5% to 15% of the sale price or if the transaction is not at arm’s length, the market value.

These changes apply to all contracts entered into on or after 1 January 2025.

Importance of ATO Clearance Certificates

All sellers should apply for an ATO Clearance Certificate before settlement to ensure compliance with these new rules.

If a buyer does not receive the certificate at or before settlement, they must withhold 15% of the purchase price and remit it to the ATO.  Buyers who fail to withhold the required amount may face penalties (of up to $3,300 as at the date of this article), along with potential interest charges.

This requirement applies even if the seller is an Australian resident but:

• did not apply for an ATO Clearance Certificate; or
• failed to provide the certificate to the buyer before settlement.

To reclaim the funds withheld, a seller will need to wait until they lodge their income tax return for a financial year.  This can impact financial plans, particularly for those who intend to use the funds immediately after settlement.

Key Considerations for Sellers

• Apply early: Most ATO Clearance Certificate applications are processed within a few days, but some may take up to 28 days.
• No need to wait for a sale: Clearance Certificates are valid for 12 months, so sellers can apply before listing their property.
• Increased withholding: Failure to provide a certificate by settlement will result in a 15% withholding, even if the seller is an Australian resident.

By obtaining an ATO Clearance Certificate in advance, sellers can avoid unnecessary delays and ensure a smooth settlement process.

For further guidance on how these changes affect your property sale, contact Hillhouse Legal Partners.