What Australian Residents Need to Know About Updates to the Foreign Resident Capital Gains Withholding (FRCGW)

Starting from 1 January 2025, the Foreign Resident Capital Gains Withholding (FRCGW) rules will be changing. Currently, Australian residents selling property worth $750,000 or more must provide a clearance certificate to the purchaser before settlement to avoid having 12.5% of the sale price withheld.

What’s Changing:

  • The withholding rate will increase from 12.5% to 15%.
  • The $750,000 threshold for property value will be removed. From 1 January 2025, the withholding rules will apply to all property sales, regardless of value.

These changes apply to contracts signed on or after 1 January 2025.

FRCGW Purpose:

FRCGW is designed to assist in the collection of tax liabilities for non-residents selling Australian property.

What Australian Residents Must Do:

All Australian residents selling property are required to obtain a clearance certificate from the Australian Taxation Office (ATO). If a vendor doesn’t provide this certificate by settlement, the purchaser will withhold 15% of the sale price and remit it to the ATO. The vendor can only receive a refund of this amount after filing their income tax return for the year.

While most clearance certificates are issued within a few days, it’s important to apply early, as some can take up to 28 days. Clearance certificates are valid for 12 months, meaning the vendor doesn’t have to wait until the contract is signed.

Variation for Foreign Resident Vendors:

Foreign resident vendors may be able to apply for a variation to reduce the withholding rate.

Understanding Foreign Resident Capital Gains Withholding (FRCGW)

FRCGW applies to both individual and non-individual vendors (property sellers) disposing of taxable Australian real property.

  • Australian Residents: If you’re an Australian resident for tax purposes, you need a valid clearance certificate from the ATO by settlement. Without this certificate, the purchaser must withhold FRCGW from the sale proceeds and remit it to the ATO.
  • Foreign Residents: If you’re a foreign resident, capital gains tax (CGT) may apply on the sale of Australian property. The purchaser will withhold FRCGW from the sale price to cover this liability, unless you have a variation notice specifying a reduced rate.

Purchasers must pay the withheld amount to the ATO at or before settlement.

Reasons for Property Disposals:

The most common reasons for disposing of property include selling or transferring the property to another person or entity. For more details, refer to CGT events.

Withholding Rate for Property Sales

  • Before 31 December 2024: The rate is 12.5% for properties valued at $750,000 or more.
  • From 1 January 2025: The rate is 15% for all property sales, regardless of value.

Example (Contract Signed Before 1 January 2025):

Jane, a foreign resident, decides to sell her apartment for $1.2 million, and Toni, the purchaser, signs the sale contract on 16 December 2024. The settlement will occur on 6 January 2025.

Since the contract was signed before 1 January 2025, Toni must withhold 12.5% of the sale price, which equals $150,000, and remit this to the ATO.

Example (Contract Signed After 1 January 2025):

If the same contract were signed after 1 January 2025, Toni would need to withhold 15% of the sale price, which equals $180,000, and remit this amount to the ATO.

Types of Assets Affected by FRCGW

FRCGW applies to taxable Australian real property (TARP), including:

  • Vacant land, residential, and commercial buildings
  • Mining, quarrying, or prospecting rights in Australia
  • Leases on real property in Australia
  • Indirect Australian real property (IARP) interests, which grant the right to occupy land or buildings

Other real property-related assets, like shares in non-listed entities holding real property or options to acquire such assets, may also be subject to FRCGW.

Excluded Transactions:

Certain transactions are exempt from FRCGW, including:

  • Transactions via an approved stock exchange (like the Australian Stock Exchange) or broker-operated systems.
  • Transactions that are subject to other withholding obligations.
  • Securities lending arrangements.
  • Transactions involving vendors in external administration, bankrupt estates, or similar insolvency situations.

Determining Market Value

Typically, the market value of property is the sale price. However, if the sale price is negotiated between the vendor and purchaser:

  • Arm’s Length: If the sale is at arm’s length, the sale price is considered the market value (before adjustments for disbursements like council rates or strata levies).
  • Non-Arm’s Length: If the sale is between related parties (non-arm’s length), the market value will differ from the sale price, and the purchaser must get an independent valuation.

Example: Non-Arm’s Length Sale by a Foreign Resident

Franz, a foreign resident, inherits a farm in Australia in February 2025. He decides to sell it to a relative for $500,000, which is below market value. A professional valuer assesses the property’s market value at $800,000.

Since Franz is a foreign resident, the FRCGW rate of 15% will apply to the market value ($800,000). The purchaser must withhold $120,000 (15% of $800,000) and remit it to the ATO.

After settling, Franz will receive $380,000 ($500,000 sale price minus $120,000 withholding) and will claim the withheld amount as a credit on his next tax return.

This summary of the changes to FRCGW rules helps clarify what Australian residents and foreign vendors need to do to stay compliant with the new withholding requirements.

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If you have any questions or would like further information, please feel free to give our office on 08 9221 5522 or via email – info@camdenprofessionals.com.au  or arrange a time for a meeting so we can discuss your requirements in more detail.


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