Capital gain tax for non-resident for tax purposes

Question

I purchased a property in 2012 for $920,000 then registered it as place of residence and lived there for 10 months then left Australia in July 2013 because I had a job offered oversea.

Since then, the house has remained as place of residence with all my utility bills are still sent there. My parents and my brother have been living there since I left Australia to look after the place for me and I don’t lease out the house so there has been no rental income made until now.

Since I left Australia in July 2013, although I am an Australian citizen, I have declared as non-resident for tax purposes because I have not made any income in Australia for the past few years and I have already paid taxes in the country where I work now.

I am now putting up this property for sale, the estimated market price is $2,000,000-$2,200,000. I have submitted an online application for foreign resident capital gains withholding clearance certificate and have received the ATO’s response as below:

"In response to your application for a foreign resident capital gains withholding clearance certificate for Nguyen Tran, we offer the following advice.

To be eligible for a foreign resident capital gains withholding clearance certificate the entity must be an Australian resident for taxation purposes at the time the contract for sale was signed.

Our current records indicate that you may be a non-resident for taxation purposes.

If you believe you are an Australian resident for taxation purposes please provide reasons for this by close of business on 13 October 2017.

Where the vendor is not an Australian resident for taxation purposes, the purchaser must pay us an amount equal to 12.5% of purchase price. Contingent upon the purchaser paying the amount to us. We will notify the vendor to confirm a payment has been received.

If the purchaser withholds an amount from the vendor but doesn’t pay the withholding to us, the vendor is not entitled to a credit as no credit has arisen. The vendor is also not entitled to claim the non-payment of the withholding as a tax loss.

In this case we will promptly take action to collect from the purchaser any withholding amount not paid by the due date. If the vendor is concerned the purchaser may not pay the withholding, the vendor should seek legal advice.

How does the foreign resident vendor claim the credit
The vendor must lodge an income tax return in order to claim the credit. The entitlement to a credit arises when we make an income tax assessment (or determine that no income tax is payable) for the relevant income year.

If the foreign resident vendor has provided their TFN to the purchaser, we are notified of this when the purchaser lodges the purchaser payment notification. We can then more easily match the amount withheld to a specific vendor for the purposes of allowing the credit.

Variations
A non-resident may be eligible to apply for a variation of the amount to be withheld. Situations where a variation would apply include entities that are not entitled to a clearance certificate or 12.5% withholding is too high compared to the actual Australian tax liability on the sale of the asset.

Reasons for a variation could include instances where:
– the property being sold is or was a main residence and the capital gains tax (CGT) main residence exemption applies;
– you will not make a capital gain on the transaction (for example, because you will make a capital loss or a CGT rollover applies);
– you will otherwise not have an income tax liability (for example, because of carried-forward capital losses or tax losses);
– there are multiple vendors, only one of whom is a foreign resident;
– a creditor of the vendor has a mortgage or other security interest over the property and the proceeds of sale available at settlement are insufficient to cover both the amount to be withheld and to discharge the debt the property secures.

For more information please view the Foreign resident capital gains withholding FAQ.

This advice provides you with interest and penalty protection
You can rely on this advice to provide you with protection from interest and penalties in the way explained below.

If the advice is incorrect and you underpay your tax as a result, you will not have to pay a penalty. Nor will you have to pay interest on the underpayment provided you reasonably relied on the advice in good faith.

Even if you don’t have to pay a penalty or interest, you still have to pay the correct amount of tax".

I am not quite sure what they meant by 12.5% of the purchase price. Does this mean this amount will be withheld from me by the purchaser? And that means I will have to pay this amount to ATO?

If I could prove that I only own 1 property in Australia and it is for residential purpose only, not for investment, and that it has been maintained as place of residence, and I have also come back to Australia 2-3 times a year and stay there during my holidays, will ATO approve my application for capital gain tax clearance certificate?

This property is scheduled to be auctioned on 21st October 2017, hence it is appreciated if I could receive the answer and sort our the solution asap.

Thank you very much.

Answer

Here is a link to our Expat’s booklet http://www.bantacs.com.au/booklets/Expats%20and%20Australian%20property%20booklet.pdf which is right up to date with the draft legislation on proposed changes that will affect non-residents for tax purposes who own property in Australia. Please make sure you share it with your Expat friends as there is a big trap if they sell their home in Australia while living overseas.

Fortunately, this trap does not apply to main residents purchased before 9th May 2017 and sold before 30th June 2019 so your timing to sell is wise. There is also a section that explains the 12.5% withholding.

In short it is the purchaser that must withhold 12.5% of the price they are paying and send it to the ATO along with your TFN so that you can claim it back when you lodge your next tax return. If this happens it is very important that your solicitor ties the purchaser up sufficiently to ensure that money is paid to the ATO because they ATO won’t give you credit if the purchaser doesn’t pay it.

You can’t qualify for a clearance certificate, this is simply because you are not a resident of Australia for tax purposes. But you can apply to vary the amount that is withheld down to zero. This is based on the fact the property is covered by your main residence exemption under section 118-145 ITAA 1997, for the whole period you owned it. That is because initially it was your home while you were a resident of Australia for tax purposes. Section 118-145 allows you to continue to cover the home with your main residence exemption in your absence.

Here is a link to the variation form you need to complete:
https://www.ato.gov.au/assets/0/104/1083/1160/48be171a-279c-46a2-93d5-3d5580a97469.pdf
On page 3 section E you need to tick the box capital gains tax exemption applies and put nil in the reduced rate of withholding requested. That is all you need to complete of section E but you also need to complete sections F, D, A and B.

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