ATO Clearance Certificates: Key Changes for Property Sales from 1 January 2025
If you're buying or selling property in Australia, it's crucial to understand the rules surrounding ATO Clearance Certificates. Significant changes are coming into effect on 1 January 2025, that will impact both vendors and purchasers. Here's what you need to know:
What is an ATO Clearance Certificate?
An ATO Clearance Certificate confirms whether a vendor (seller) is an Australian resident for tax purposes. It's primarily used to ensure that foreign residents selling Australian property comply with their tax obligations.
Why is it Important?
If a vendor doesn't provide a valid ATO Clearance Certificate to the buyer before settlement, the buyer is legally required to withhold a portion of the purchase price and remit it to the Australian Taxation Office (ATO). This withholding is essentially a prepayment of the vendor's potential capital gains tax liability.
The Big Changes Coming on 1 January 2025
As of 1 January 2025, two key changes will significantly broaden the scope of these rules:
1. Increased Withholding Rate: The withholding rate will increase from 12.5% to 15%. This means buyers will need to withhold a larger portion of the purchase price if the vendor doesn't provide a clearance certificate.
2. Removal of the Property Value Threshold: Currently, the withholding rules only apply to properties with a market value of $750,000 or more. From 1 January 2025, this threshold will be removed entirely. The withholding rules will apply to all property sales, regardless of the property's value.
What Does This Mean for Sellers?
- Apply for a Clearance Certificate: If you're an Australian resident selling property, it's more important than ever to apply for an ATO Clearance Certificate well in advance of settlement. This will prevent the buyer from having to withhold 15% of the sale price.
- Application is Free: Applying for a clearance certificate is free and can be done online through the ATO website.
- Allow Processing Time: The ATO typically processes clearance certificate applications within 14 to 28 days, so don't leave it to the last minute.
- Provide to Buyer: Give the certificate to the buyer before settlement.
What Does This Mean for Buyers?
- Request a Clearance Certificate: As a buyer, you should always request an ATO Clearance Certificate from the vendor.
- Withholding Obligation: If the vendor doesn't provide a valid clearance certificate before settlement, you are legally obligated to withhold 15% of the purchase price and remit it to the ATO.
- Seek Legal Advice: Consult with your solicitor or conveyancer to ensure you understand your obligations and comply with the withholding rules.
- Due Diligence: Even if a clearance certificate is provided, it's still important to conduct your own due diligence to ensure the vendor is indeed an Australian resident for tax purposes.
Why These Changes?
These changes are designed to strengthen the integrity of the foreign resident capital gains tax (FRCGT) withholding regime and ensure that foreign residents pay their fair share of tax on Australian property sales.
In Summary
The upcoming changes to ATO Clearance Certificate rules will have a significant impact on property transactions in Australia. Both buyers and sellers need to be aware of their obligations and take the necessary steps to ensure compliance. By applying for a clearance certificate (for sellers) and requesting one (for buyers), you can avoid potential complications and ensure a smooth property transaction.