Changes to Australian Foreign Resident Capital Gains Withholding (FRCGW)

This article written by Australian member firm, Leebridge Group, summarises the recent changes to Australian Foreign Resident Capital Gains Withholding (FRCGW).

Background and what is FRCGW?

The foreign resident capital gains withholding (FRCGW) was first introduced with effect from 1 July 2016 with the intention to support collection of tax from foreign residents who sell certain taxable Australian property. It originally applied to all vendors (individuals and non-individuals) disposing of taxable Australian property with a market value over AUD$2 million. A 10% withholding tax was required to be withheld by the purchaser and remitted to the Australian Tax Office (ATO).

FRCGW applies to the following assets:

• taxable Australian real property – i.e vacant land, buildings, residential and commercial property
• mining, quarrying or prospecting rights where they are situated in Australia
• a lease over real property in Australia where a lease premium is paid
• an indirect taxable Australian real property interest

Vendors can avoid the withholding requirement by obtaining a Foreign Resident Capital Gains Withholding Clearance Certificate from the ATO and produce it to the purchaser prior to settlement of the property. However, it is important to note that only Australian tax residents can obtain a Foreign Resident Capital Gains Withholding Clearance Certificate.

From 1 July 2017, the FRCGW threshold was decreased to AUD$750,000 and the withholding rate increased from 10% to 12.5%.

How does the FRCGW work?

FRCGW is not a separate tax, it is a non-final advance payment of tax when taxable Australian property is sold.

Foreign tax residents are not entitled to a Foreign Resident Capital Gains Withholding Clearance Certificate. When selling property without a valid clearance certificate, the purchaser of the property must withhold a portion of the sale proceeds at the prescribed withholding rate and remit it to the ATO at or before settlement of the property. Therefore, it is crucial for Australian tax resident vendors to obtain a clearance certificate in a timely manner to avoid a withholding requirement for the purchaser.

A withholding variation application for a reduced rate of FRCGW may be applied for by foreign tax resident vendors if they can demonstrate to the ATO that the prescribed withholding rate is excessive.

If an amount is withheld from the sale price, vendors will only receive any tax refund after an Australian income tax return is lodged with the ATO.

New FRCGW Changes

The Treasury Laws Amendment (2024 Tax and Other Measures No. 1) Bill 2024 which received Royal Assent on 10 December 2024 introduced the following 2 key changes that apply from 1 January 2025:

• increase the FRCGW withholding rate from 12.5% to 15%; and
• remove the threshold before which withholding applies so that all disposals of taxable Australian property by a foreign resident are subject to FRCGW requirements regardless of market value of the taxable Australian property (i.e reducing the threshold of AUD$750,000 to AUD$0).

In other words, starting from 1 January 2025, the withholding rate has increased to 15% and FRCGW applies to all property sales regardless of value.

ATO data indicates that amounts withheld are increasingly falling short of the assessed tax liabilities of foreign residents on their disposals of Australian properties and that there has been a low tendency for foreign residents to lodge an Australian income tax return unless they are in a refundable position.

With the newly increased withholding rate and reduced threshold, foreign residents selling taxable Australian property will have a greater incentive to comply and lodge their Australian tax return so that their final tax liabilities can be properly assessed and any refund obtained.

This new change in FRCGW rates is significant and will produce increased compliance burdens for all involved in Australian property transactions. It is now essential for those who are considering buying or selling taxable Australian properties, to seek proper advice as to how the FRCGW rules affect their transactions, especially since these new rules apply to all property transactions regardless of their market value and failure to comply with these new FRCGW rules may result in serious penalties for vendors.

Article written by:

Jenny Wong jenny.wong@leebridgegroup.com.au and Chris Wookey chris.wookey@leebridgegroup.com.au.