Foreign Resident Capital Gains Withholding Tax Regime Changes

The impact proposed changes to the Foreign Resident Capital Gains Withholding Tax Regime will have on property sellers.

The Australian Government has announced proposed changes to the Foreign Resident Capital Gains Withholding Tax Regime that will affect sellers of real property throughout Australia.

What is the Foreign Resident Capital Gains Withholding Tax Regime?

The Foreign Resident Capital Gains Withholding (FRCGW) Tax Regime applies to sellers disposing of certain taxable property and exists to assist with the collection of Australian tax liabilities from foreign residents.

Under the current system, when the purchase price for real property contracted to be sold is $750,000.00 or more, an obligation is imposed on the Buyer to withhold and pay 12.5% of the purchase price directly to the Australian Taxation Office (‘ATO’) on settlement, unless prior to settlement each Seller produces a valid ATO clearance certificate, or a variation notice reducing the Capital Gains Tax (‘CGT’) withholding amount (in which event the reduced amount must be paid directly to the ATO on settlement).

To avoid 12.5% of the purchase price being withheld at settlement and paid to the ATO, a Seller must apply for, obtain and then provide a copy of their ATO clearance certificate to the Buyer before settlement. A clearance certificate will usually be issued by the ATO if the Seller is an Australian resident. For foreign resident sellers, an application can be made to the ATO for a variation notice to potentially lower the amount of the required CGT withholding. It is recommended that independent taxation advice be sought in these circumstances.

What are the proposed changes?

The following changes to the FRCGW Tax Regime are proposed to come into effect from the later of 1 January 2025 and the commencement date of the amending Bill:

• The threshold market value of Taxable Australian Real Property (‘TARP’) to which the FRCGW will apply will be reduced from $750,000.00 to $0.00 (meaning that FRCGW will apply to all sales of real property throughout Australia, regardless of the amount of the purchase price); and
• The withholding amount will increase from 12.5% to 15% of the purchase price.

If enacted, these changes will impact the sale of all real property throughout Australia, as all sellers will be required to obtain either an ATO clearance certificate or a variation notice, regardless of the amount of the purchase price of the property being sold. If a Seller fails to provide their Buyer with either a valid ATO clearance certificate or a variation notice (that reduces the CGT withholding amount to be paid at settlement) before settlement, the Buyer will be required to withhold and pay 15% of the purchase price directly to the ATO on settlement.

We can assist you

If you require assistance in applying for an ATO clearance certificate, have any concerns about how the proposed changes to the FRCGW Tax Regime may impact you, or should you have any other questions regarding the sale of property in Queensland, please do not hesitate to contact one of the experienced property law solicitors at Wallace & Wallace Lawyers on (07) 4963 2000 or via the link below.