What is Foreign Resident Capital Gains Withholding?

The Federal Government's Mid-Year Economic and Fiscal Outlook report, released on 13 December 2023, has introduced pivotal changes that will significantly impact the real estate sector in Australia. Among the most notable amendments are those made to the Foreign Resident Capital Gains Withholding (FRCGW) regime. This blog aims to dissect these changes, elucidate their implications, and offer guidance to property vendors and purchasers navigating the evolving landscape of real estate taxation in Australia.

What is Foreign Resident Capital Gains Withholding (FRCGW)?

Introduced in 2016, the FRCGW was initially applied to real estate transactions over $2 million. This regime mandated a 10% capital gains withholding tax to be retained by the purchaser, irrespective of the vendor’s residency status, unless a qualifying clearance certificate was produced before settlement. Initially affecting a minimal number of transactions, the FRCGW saw significant changes in 2017. The threshold for transactions subject to FRCGW was lowered to $750,000, and the tax rate was increased to 12.5%.

These changes meant that all vendors selling property over $750,000 had to prove they were not foreign residents, significantly impacting a larger number of transactions. Compliance with these rules became a priority for vendors and their conveyancers. The clearance certificate, obtainable online from the Australian Taxation Office (ATO), is a critical document in these transactions, and vendors must apply for it early enough to avoid delaying settlement.

The requirement for a Foreign Resident Capital Gains Withholding Clearance Certificate applies to all vendors, regardless of whether they are Australian citizens or foreign residents, for sales of $750,000 and above. This emphasises the importance of understanding and complying with FRCGW regulations for all parties involved in property transactions in Australia.

What is the Capital Gains Tax in Australia for Foreign Residents?

Capital Gains Tax (CGT) in Australia, particularly for foreign residents, has evolved since the introduction of the FRCGW. Originally set at 10% for transactions over $2 million, the CGT was applied as a withholding tax during property sales. This rate increased to 12.5% in 2017, broadening its scope to include properties valued over £750,000. The latest changes, effective from 1 January 2025, further adjust this rate to 15%, significantly impacting foreign residents and Australian citizens alike. This adjustment is a clear indicator of the government's proactive stance in ensuring tax compliance in real estate transactions and its commitment to maintaining fairness in the property market.

Do You Pay CGT if You Are Non-Resident?

For non-residents of Australia, the obligation to pay CGT is determined by several factors, including the nature of the property and the residency status of the vendor. Non-residents are subject to CGT and the corresponding FRCGW on the sale of Australian property. It's critical to note that irrespective of the vendor's residency status, for properties valued at $750,000 or above, obtaining a clearance certificate from the ATO is mandatory. This certificate is the vendor's responsibility and serves as proof of their residency status. Without it, purchasers are compelled to withhold 12.5% of the purchase price, remitting it directly to the ATO, to ensure compliance with tax obligations.

Are Capital Gains Subject to Withholding?

In the context of Australian real estate, capital gains are indeed subject to withholding under the FRCGW regime. This withholding is applied to ensure that foreign residents meet their tax obligations on the sale of property in Australia. The role of the Foreign Resident Capital Gains Withholding Clearance Certificate is pivotal in this process. If a vendor fails to provide this certificate to the purchaser at or before settlement, the purchaser is obligated to withhold a portion of the sale price – currently 12.5% and set to increase to 15% from 2025. This measure safeguards the tax interests of the Australian government and ensures a streamlined process for tax collection from foreign residents.

New Changes to the FRCGW

Starting 1 January 2025, the FRCGW will undergo significant changes. The withholding tax rate will be increased from the current 12.5% to 15%. More notably, the threshold for properties subject to this regime will be lowered to nil, meaning that the regime will apply to all real property transactions, irrespective of value. These changes are part of the Government's strategy to improve housing affordability for Australians and to enhance compliance with tax obligations by foreign residents. The financial impact of these changes is estimated to increase Government receipts by $150.5 million, with an increase in payments by $5.9 million over five years from 2022-23.

Conclusion

The recent changes to the FRCGW regime signify a substantial shift in the Australian real estate market, particularly affecting foreign residents. Understanding and navigating these changes can be complex, and staying informed is crucial for anyone involved in property transactions. For expert guidance and assistance in ensuring compliance with these new regulations, reach out to Pearson Chambers Conveyancing. Our experienced team is well versed in the nuances of property law and can help streamline your real estate transactions. Contact us at 0421 058 106 or email contact@pearsonchambers.com.au for personalised assistance and professional advice.