What to Do When There's No Clearance Certificate: Navigating Foreign Resident Capital Gains Withholding

As a provider of taxation services, it's essential to stay informed about the intricacies of tax regulations to assist your clients effectively. One such area of concern is the requirement for a foreign resident capital gains withholding (FRCGW) clearance certificate during property settlements. In this blog post, we will explore the implications of not obtaining a clearance certificate and guide you through the necessary steps to rectify the situation.

Understanding the FRCGW Clearance Certificate: When a property valued at $750,000 or more is sold by an Australian resident for tax purposes, they must provide an FRCGW clearance certificate to the purchaser before or at settlement. Failure to provide this certificate results in a withholding of 12.5% of the property purchase price, which is then remitted to the Australian Taxation Office (ATO).

Reasons for Not Obtaining a Clearance Certificate: There are several reasons why clients may not have obtained a clearance certificate before the settlement date. Some common reasons include:

1. Outdated Tax Records: Clients may have neglected to keep their tax records up to date, resulting in delays or difficulties in obtaining the necessary clearance certificate.

2. Non-Filing of Tax Returns: If clients haven't been required to lodge tax returns for several years due to their income falling below the threshold, they may not have prioritized obtaining a clearance certificate.

3. Insufficient Time for Application: Obtaining a clearance certificate can be a time-consuming process, taking up to 28 days for the ATO to process. Clients who haven't allowed sufficient time before settlement may find themselves without the required certificate.

Steps to Take When No Clearance Certificate Is Available: If any of your clients find themselves in a situation where a clearance certificate wasn't obtained before settlement, it's crucial to take the following steps:

1. Lodge a Tax Return: Even if the client's income falls below the threshold requiring them to lodge a tax return, it is necessary to file one in order to claim the credit that was withheld during the property transaction.

2. Declare Australian Assessable Income: When completing the tax return, ensure that the client declares their Australian assessable income, including any capital gain or loss resulting from the property disposal.

3. Claim Credit for Withholding Amount: Clients should claim a 'Credit for any withholding amount' taken from the sale proceeds. This will enable them to receive a refund of the withheld amount if no capital gains tax (CGT) is payable on the property sale, provided there are no outstanding tax debts.

Navigating the requirements of foreign resident capital gains withholding can be complex, particularly when a clearance certificate is not obtained before property settlement. As a provider of taxation services, it is crucial to educate your clients about the importance of obtaining the necessary documentation to avoid withholding complications. In cases where a clearance certificate was not obtained, guiding clients to lodge a tax return and claim the withheld amount as a credit is essential to ensure a timely refund if CGT is not applicable. By proactively addressing this issue, you can help your clients rectify the situation and maintain compliance with tax regulations.

Disclaimer: The information provided in this blog post is for general informational purposes only and should not be considered professional advice. It is recommended to consult with a qualified tax professional regarding specific tax situations and requirements.