Withholding Tax: Sale of Australian Property : FRCGW
A relatively simple rule applies to anyone buying Australian property valued at $750,000 or more; they must withhold 12.5% of the purchase price and pay this directly to the ATO directly unless the seller provides either a clearance or variation certificate which confirms that they are a resident taxpayer or an exemption applies.
This tax is technically referred to as Foreign Resident Capital Gains Withholding tax (FRCGW). It was first introduced in July 2016, but initially only impacted properties with a value of $2m or higher and applied a withholding tax rate of 10%. The lower benchmark of $750,000 and increased rate of 12.5% has applied since July 1, 2017 and very significantly widened the impact of the tax.
As part of the Government's Mid-Year Economic and Fiscal Outlook (MYEFO) it was announced in December, 2023 that the following changes would be made in relation to FRCGW, "Increasing the foreign resident capital gains withholding tax rate from 12.5 per cent to 15 per cent and reducing the withholding threshold from $750,000 to $0. The changes will apply to real property disposals with contracts entered into from 1 January 2025."
Many expatriates who retain properties in Australia are impacted by the provision, and need to appreciate the following main attributes:
- Clearance certificates, which provide an exemption from FRCGW, are available only to Australian residents - they are not available if the seller is a "foreign resident" (i.e. non-resident for Australian tax purposes). The fact that you may be an Australian citizen or permanent resident, rather than a foreign citizen, is not relevant for the purposes of this tax and will not provide any dispensation.
- The legislation is structured such that unless you arrange a "clearance certificate" from the ATO, FRCGW must be remitted to the ATO on sale by the purchaser. So, the default situation is that FRCGW will apply if the property vendor does nothing. Clearance certificates are valid for 12 months and can be used by the same vendor for the sale of multiple properties while valid.
- Where there are multiple purchasers or vendors it is the aggregate value of the property that will determine whether FRCGW will apply - regardless of whether some part owners of the property may also be tax residents. FRCGW will only be payable in relation to that portion value of the property owned by a non-resident, but conveyancers should seek and require tax advice in all but the most standard of situations. Each vendor, including joint tenants separately, will need to provide separate certificates of clearance.
- The clearance certificate application can be completed by either the vendor, or their authorised agents - such as a solicitor or tax agent, but not by a conveyancer. Note that sellers need to provide a valid clearance certificate on or before the settlement of the transaction.
Where the vendor is automatically assessed as an Australian resident, a clearance certificate will be issued electronically within days of the application being submitted. But, if there are data irregularities or exceptions, some manual processing may be required and the clearance certificate is expected to be provided within 14–28 days.
Flexibility - Applying for a Variation
Where the vendor is not entitled to a clearance certificate, for example, if they are a non-resident Australian citizen or PR, but believe the payment of FRCGW is inappropriate, they can apply for a variation certificate.
Situations in which a variation certificate may be available include:
- Where the vendor is selling a property which is not liable to capital gains tax because they can claim the main residence exemption. The ATO will closely review these situations - particularly if data suggests that the vendor has rarely, if ever, been a tax resident. This basis has largely disappeared given that non-residents have been unable to claim the CGT main residence exemption with effect from 1 July, 2020.
- The foreign resident is not making a capital gain on the transaction (for example, because they will make a capital loss, or a CGT rollover applies).
Claiming a Credit for payment of FRCGW
The foreign resident vendor must lodge a tax return at the end of the financial year, declaring their Australian assessable income, including any capital gain from the disposal assets. A tax file number (TFN) is required to lodge a tax return and they will need to apply for a TFN if they don't have one. This provides a vendor with the opportunity to claim a credit for any withholding amount paid to the ATO in their tax return.
If the purchaser fails to withhold from the purchase price as required, then the ATO can currently impose a penalty of $2,100 for failing to remit the withheld amount, as well as a penalty equal to the amount they failed to withhold, plus a general interest charge (GIC). Given that the chances of recovering the funds from a foreign vendor may be small, this is a very substantial penalty. There are many complexities attaching to the application of these provisions outside the standard situations above and we encourage individuals to seek early professional advice.
If you would like to arrange professional advice please complete the Inquiry form below providing details and you will be contacted promptly.