10 Jan 2024

2024 Guide to Navigating ATO Clearance Certificates

Recent changes to the ATO clearance certificate laws, effective from 1 July 2017, have significant implications for real estate transactions in Australia. While initially targeting foreign investors, these changes place the responsibility on Australian residents to navigate the complexities of the foreign resident capital gains tax.

In this blog article, we’ll delve into the intricacies of ATO clearance certificates, exploring why they matter, who is affected, and how to obtain one.

What is an ATO Clearance Certificate?

The ATO clearance certificate serves as a crucial document, signalling both to the purchaser and the government that the property seller is an Australian resident. It allows the seller to bypass the 12.5% foreign resident capital gains tax withholding for properties valued over $750,000. Valid for 12 months, the certificate can be used for multiple property sales during this period.

Foreign Resident Capital Gains Withholding Tax Explained

Implemented on 1 July 2016, the foreign resident capital gains withholding requires buyers of properties valued at $750,000 or more to set aside 12.5% of the purchase price for the ATO if the seller is a foreign resident. This tax aims to ensure proper payment of capital gains tax by foreign residents and address housing affordability concerns. Before the law change, the threshold was $2 million, with a 10% withholding rate.

Who does Foreign Resident Capital Gains Tax affect?

The changes impact over half of the Australian real estate market, affecting all sellers and buyers of properties valued at or over $750,000. This shift is significant, especially for Australian resident property sellers.

The impact on Australian property owners

Australian resident property sellers can be exempt from the foreign resident capital gains tax if the property is below $750,000. Otherwise, they must provide an ATO clearance certificate to the buyer. Failure to produce the certificate results in the seller being treated as a foreign resident, leading to a 12.5% withholding of the property’s value.

If multiple vendors are involved, each must obtain their clearance certificates. While settlement may be delayed for certificate procurement, this requires an agreement between the seller and the purchaser.

What Happens to Foreign Resident Property Sellers?

Foreign resident property sellers face a 12.5% withholding by the buyer, which is remitted to the government as part of the foreign resident capital gains tax. They cannot apply for an ATO clearance certificate, however, variation of the tax rate is possible based on individual circumstances, but early application is crucial.

Effects on Property Buyers

Regardless of the residency status of the buyer, if the seller fails to provide an ATO clearance certificate by settlement, the buyer must withhold 12.5% of the purchase price for the ATO. Non-compliance may attract additional interest, emphasising the importance of adhering to the regulations.

How to Get an ATO Clearance Certificate

The application process for an ATO clearance certificate is free and can be initiated online on the ATO website. The certificate is issued to signify the seller’s Australian residency, enabling the buyer to forgo withholding the foreign resident capital gains tax. Tax agents or legal practitioners may assist in the application process, potentially incurring additional fees.

When to Apply for an ATO Clearance Certificate

Applying as soon as possible is crucial to avoid delays in settlement. Online applications typically have faster processing times, roughly half of all applications are automatically processed. The ATO sends certificates within days for online applications. However, mail applications, manually processed, may take 14 to 28 days, with potential delays for complicated cases.

Key Summary Notes:

  • ATO clearance certificate indicates Australian residency.
  • Foreign resident capital gains withholding at 12.5% for properties over $750,000.
  • Changes impacts approximately 60% of the Australian real estate market.
  • Australian resident sellers must provide a clearance certificate to avoid withholding.
  • Foreign resident sellers face a 12.5% withholding; exemptions based on main residence status until June 2019.
  • Buyers withhold 12.5% if no clearance certificate is provided.
  • The application is free, online, and requires key information.
  • Apply early to avoid settlement delays.
  • The best agents can guide you through the application process swiftly.

Understanding the nuances of ATO Clearance Certificates is essential for smooth real estate transactions in the evolving landscape of Australian property laws. By grasping the intricacies of these changes, sellers and buyers can confidently navigate the process and ensure a seamless settlement.

For further information, or should you require an ATO Clearance Certificate or need help navigating the complexities of the buying and selling process, Vicki Philipoff Settlements is here to help, feel free to contact us today!

As Perth’s leading conveyancing and settlement agency we have conducted thousands of settlements for our satisfied clients. If you’re interested in our conveyancing and settlement services, email us today or apply for a free quote and Settle With Ease®️.