SMSFs at risk of ‘large penalties’ from foreign resident CGT
Some SMSF trustees are wrongly assuming that the foreign resident capital gains withholding rules for property won’t apply to them, and could be hit with significant penalties where they fail to meet certain requirements, warns a technical expert.
Insyt chief executive Darren Wynen said with the foreign resident gains withholding now applying to all property disposals where the contract price is $750,000 or more from 1 July 2017, SMSFs who are buying or selling property, or selling an interest in a unit trust that holds property, will need to ensure they comply with certain obligations to avoid being hit with a withholding penalty.
“A lot of people don’t think the rules apply to them because they’re residents but the presumption is that everyone is a non-resident until they comply with the obligations,” Mr Wynen warned.
The foreign resident capital gains withholding rules were introduced, Mr Wynen explained, to address the difficulties with chasing foreign residents overseas for tax after they sell a property in Australia.
“So the government came up with a system for foreign residents where tax is withheld by the buyer and sent to the ATO which means the ATO receives some money upfront, making it easier from a revenue collection perspective,” he said.
The rules impose an obligation for the purchaser to withhold 12.5 per cent of the purchase price and pay it to the ATO where a vendor enters a contract on or after 1 July 2017.
In order to avoid this, SMSF trustees must obtain a clearance certificate from the ATO prior to settlement for a direct purchase. Alternatively if the trustee owns at least 10% of a unit trust or company that has an asset base mostly of property, they may have to provide the purchaser with a vendor’s declaration to specify withholding isn’t required on the acquisition, he said.
“If they get it wrong there’s a penalty of 12.5 per cent of the purchase price, so if you’ve got a $1 million property, you’re talking about a $125,000 penalty,” he warned.
“Even though it’s often just a resident to resident transfer, the technicalities can result in large penalties. So whenever trustees are buying property, or interests in unit trusts or companies where the main assets are property, they’ve got to step back and make sure that the obligations are complied with so that they don’t get penalised.”
Miranda Brownlee is the deputy editor of SMSF Adviser, which is the leading source of news, strategy and educational content for professionals working in the SMSF sector.
Since joining the team in 2014, Miranda has been responsible for breaking some of the biggest superannuation stories in Australia, and has reported extensively on technical strategy and legislative updates. Miranda has also directed SMSF Adviser's print publication for several years.
Miranda also has broad business and financial services reporting experience, having written for titles including Investor Daily, ifa and Accountants Daily.