Foreign Resident Capital Gains Withholding Changes from 1 January 2025
ATO Clearance Certificates Required for All Property Sales
The Australian Taxation Office (ATO) has updated its guidance to reflect changes to the foreign resident capital gains withholding (FRCGW) regime, effective from 1 January 2025. These changes impact both foreign residents disposing of taxable Australian property and purchasers involved in such transactions.
Key changes to FRCGW
From 1 January 2025, the following adjustments apply to property sales where contracts are signed on or after this date:
The FRCGW rate has increased from 12.5% to 15%.
The previous $750,000 threshold has been removed, meaning all property sales, regardless of value, may be subject to withholding.
Implications for Australian residents
Australian residents selling Australian real property must provide the purchaser with a clearance certificate from the ATO at or before settlement. If a clearance certificate is not provided, the purchaser is legally required to withhold 15% of the sale price and remit it to the ATO.
While clearance certificates are typically processed within a few days, they can take up to 28 days to issue. Sellers should apply for a clearance certificate as early as possible to avoid potential cash flow issues.
Foreign residents disposing of property
The ATO is increasing its scrutiny of foreign residents who dispose of taxable Australian property (TAP) but fail to meet their tax obligations. Additionally, the ATO is monitoring purchasers who do not withhold FRCGW when required.
Foreign residents are subject to capital gains tax (CGT) in Australia if they dispose of TAP, which includes:
Taxable Australian real property (TARP), such as land and buildings located in Australia.
Indirect interests in Australian real property, such as shares in companies holding Australian land or buildings.
Assets used in carrying on a business through a permanent establishment in Australia.
Options or rights to acquire any of the above assets.
The ATO is focusing on foreign residents who:
Hold significant direct or indirect interests in TAP assets.
Dispose of TARP or indirect interests but do not meet their CGT obligations.
Mischaracterise or undervalue assets to avoid CGT.
Enter into staggered sell-down transactions to bypass tax liabilities.
Lodge tax returns that do not comply with the new associate-inclusive test for participation interests.
Misapply the principal asset test, improperly allocating significant market value to non-TARP assets.
May not have sufficient funds or assets in Australia to meet their tax obligations.
Purchaser responsibilities
Purchasers of Australian property from foreign residents must withhold 15% of the purchase price and remit it to the ATO unless the foreign resident vendor provides a variation notice specifying a reduced withholding rate.
Vendors seeking a variation should apply at least 28 days before settlement via the ATO’s online form.
