As the purchase contract is entered into on or after 1 July 2017, a withholding rate of 12.5% applies. Accordingly, Michael withholds $125,000 from the purchase price of the house and pays Jane $875,000 at settlement (i.e., $1 million less $125,000). Jane is entitled to refundable credits on the withholding amount (i.e., $125,000) upon lodgment of her 2020 tax return, which may be applied to reduce her income tax liability.
Would the answer change if Jane qualified for the main residence exemption?
If Jane’s capital gain is either fully or partially exempt from CGT under the main residence exemption (e.g., under the transitional rules), she may apply to the ATO for a variation notice to reduce the withholding rate applicable to the transaction. Jane should apply for the rate to be varied to 0% if she qualifies for a full main residence exemption, and anywhere between 0% and 12.49% if a partial main residence exemption applies.
Once the variation notice has been finalised by the ATO, it is Jane’s responsibility to provide it to Michael before settlement to ensure the reduced withholding rate applies.
What if Jane is an Australian resident for tax purposes?
If Jane is an Australian resident for tax purposes, she should apply for a clearance certificate, which effectively confirms that the ATO accepts that she is an Australian resident, and that the foreign resident CGT withholding rules do not apply to the transaction. This should be provided to Michael before settlement, so he does not withhold any amount from the purchase price.