A short settlement period means you get the sale proceeds in your hands quicker, right?
The ATO presumes all sellers are non-resident unless that presumption is rebutted. To rebut this assumption, Sellers are required to provide an ATO Foreign Residents Capital Gain Tax Clearance Certificate (Clearance Certificate) where the sale price is $750 000 and over.
Lately, we are observing more and more residential house sale contracts with settlement periods of 21 days or less. Given that the ATO website states that Clearance Certificates may take up to 28 days from the application date to issue, the timing poses a risk to obtaining the Clearance Certificate by the settlement date.
Anecdotal evidence suggests delays are often caused because the seller has not lodged a tax return (pensioners and some company structures may be placed in a manual queue) or the seller has been overseas for a number of years.
If a seller cannot provide a Clearance Certificate by the settlement date, the buyer must withhold 12.5% of the sale price and pay this to the ATO, potentially a significant sum that may impact the seller’s next steps. Even worse, if the seller has a sizeable mortgage to repay they may not be able to remit the withholding amount to the ATO giving the buyer a termination right.
What can you do to reduce the potential risk?
As a seller, you should apply for a Clearance Certificate as soon as possible. You should consider applying before you market your property or at the time you choose your listing agent. A seller does not have to wait until they sign the contract, they can apply for the Clearance Certificate at any time.
- shortened contract periods may cause issues with sellers obtaining the ATO Clearance Certificate.
- the ATO allows a seller to apply for a Clearance Certificate prior to signing a contract of sale.
- some sellers are unaware of the process or believe a clearance certificate is only required to be obtained by foreign residents.
- sellers should be proactive and obtain an ATO Clearance Certificate early.
- If a seller is at the stage where a buyer is found, they should consider including a special condition that allows them to extend the settlement date if an ATO Clearance Certificate has not been obtained prior to the settlement.
Our Property Law experts are here to help you navigate scenarios like these, contact our team today.