Understanding Foreign Resident Capital Gains Withholding and the Recent Changes

What is Foreign Resident Capital Gains Withholding (FRCGW)?

Foreign Resident Capital Gains Withholding is a tax system introduced by the Australian government to ensure that foreign property sellers meet their Australian capital gains tax (CGT) obligations. Under this regime, buyers are required to withhold a percentage of the sale price and remit it to the Australian Taxation Office (ATO) at settlement. This helps to ensure compliance with Australian tax laws for foreign sellers.

From 1 January 2025, significant changes to FRCGW are in in effect, expanding its scope to include all sellers of property, and not just foreign sellers.

Key changes to FRCGW

‍‍Implication for Sellers

All sellers must apply for an ATO clearance certificate, even if they are Australian residents. Without the clearance certificate, buyers must withhold 15% of the sale proceeds. This creates a significant compliance obligation for sellers, even if they are Australian residents, as they will no longer be able to avoid FRCGW if the property was sold for under the previous $750,000.00 threshold.

Foreign sellers will still be subject to withholding and will need to lodge a tax return to recover any overpaid amounts. This could significantly impact cash flow for sellers, who will need to plan ahead to ensure they have sufficient funds to cover the withheld amount.

Lawyers and conveyancing will usually obtain the clearance certificate as part of the conveyancing process.

ATO clearance certificates are valid for 12 months from the date of issue, and applicants do not wait until a contract has been signed before applying.

Implications for Buyers

Buyers now have responsibility to ensure that the correct amount is withheld and remitted to the ATO. If a seller does not provide a valid clearance certificate before settlement, the buyer must withhold 15% of the purchase price. Buyers who fail to comply may be held personally liable for the withholding tax, along with potential penalties, so it is important to ensure everything is in order before settlement.

Conclusion

With the changes to FRCGW taking effect in January 2025,both sellers and buyers must remain diligent in meeting their obligations. Sellers should obtain a clearance certificate well in advance to avoid the application of withholding tax, while buyers need to ensure they comply with the new withholding rate. Sellers should work closely with their legal and tax advisors to ensure compliance with the new rules and minimise any potential tax implications.

How Sharrock Pitman Legal can assist?

Australia’s tax regime is complicated. With the current focus on Australia’s housing supply and affordability, it is crucial that property owners, investors as well as property and financial advisors understand and comply with all tax obligations.

If you require assistance with the withholding process or need advice on how to minimise the impact of the FRCGW changes, please contact our Accredited Specialist Property Law team on 1300 205 506 or email sp@sharrockpitman.com.au.

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The information contained in this article is intended to be of a general nature only and should not be relied upon as legal advice. Any legal matters should be discussed specifically with one of our lawyers.

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