One of the Bills pushed through Parliament at the end of 2024 changes how capital gains withholding applies to foreign residents from 1 January 2025.
Currently, residents selling taxable Australian property must provide a clearance certificate to the purchaser at or before settlement to avoid having 12.5% withheld from a property sale where the value of the property is $750,000 or more. If applicable, the withholding is then made available as a credit against any tax liability. The vendor only receives any refund due after their next income tax return is processed at tax time
From 1 January 2025 however, the threshold will be removed and the withholding rate increased so that:
- The withholding rate is increased from 12.5% to 15%; and
- The withholding applies to the sale of all Australian real property including vacant land, buildings, residential and commercial property by foreign residents, regardless of the value of the assets. Australian residents or entities can continue to apply for the clearance certificates to avoid 15% withholding
Changes are applicable for all the contracts entered into on or after 1 January 2025.
The Purpose of the FRCGW
FRCGW is a mechanism designed to ensure that non-residents selling Australian property meet their tax obligations. It acts as a form of pre-collection of capital gains tax (CGT) on property sales by foreign residents. The FRCGW ensures that the Australian Taxation Office (ATO) can collect tax liabilities that may be due from non-residents in relation to their Australian property sales.
Clearance Certificate:
To avoid withholding, Australian residents or entities must apply for a clearance certificate from the ATO. This certificate confirms that the vendor is a resident for tax purposes and that the sale is not subject to withholding. It is critical for vendors to apply for this certificate early, as while most certificates are issued within a few days, some can take up to 28 days to process. The certificate is valid for 12 months, meaning that vendors can apply for it ahead of signing a contract and it will remain valid for any subsequent property sales within that time frame.
If withholding occurs, the vendor can claim any amount overpaid when they submit their income tax return. The refund will be processed once the ATO has processed the return.
Important Considerations:
- Timeliness: Vendors should apply for the clearance certificate as early as possible to avoid delays. The ATO’s processing time can vary, and late applications may result in 15% of the sale price being withheld.
- Foreign Residents: Foreign vendors may still apply for a variation of the withholding rate if applicable.
