Changes to Capital Gains Withholding Tax

Tightening the foreign resident capital gains withholding tax regime

As originally announced in the 2023–24 Mid-Year Economic and Fiscal Outlook, the Government has released draft legislation and explanatory materials for consultation on measures intended to improve the integrity of the foreign resident capital gains tax withholding regime.

The withholding tax rate for the capital gains tax regime for non-residents is proposed to increase from 12.5 per cent to 15 per cent and the $750,000 property value threshold is proposed to be removed and reduced to nil.

What you need to know.

The regime currently applies to require a purchaser to withhold 12.5% of the proceeds from a transaction where a non-resident vendor disposes of an asset that is taxable Australia property for $750,000 or more.

Currently, this regime imposes a withholding rate of 12.5% on the sale of Australian properties with a value of $750,000 or more if the vendor is a foreign resident or hasn’t obtained a clearance certificate from the ATO.

The Government proposes to modify the rules in this area as follows:

> Increase in the FRCGW rate for relevant CGT assets from 12.5% to 15%.

> Remove the current $750,000 threshold before which withholding applies for transactions involving taxable Australian real property or an indirect Australian real property interest that causes a company title interest to arise.

These changes do not affect the exemption from FRCGW where a vendor obtain a clearance certificate from the Commissioner of Taxation that they are not a foreign resident or make a residency declaration or a declaration that the asset is a not an indirect Australian real property interest.

What is the expected impact of the proposed changes?

The government’s reasoning in increasing the FRCGW rate from 12.5% to 15% is that the current rate is not sufficient to recover capital gains especially given increases in property prices in recent years.

Removal of the $750,000 threshold will require a purchaser to withhold 15% tax in relation to all transactions involving the disposal of TARP or IARPI unless the vendors provide an ATO clearance certificate or make a declaration confirming that they are not a foreign resident or, for indirect interests in TAP, a declaration that the indirect interests are not IARPI in respect of the transaction.

When are the proposed changes applicable?

The proposed changes, if enacted, will apply to CGT events occurring from the later of 1 January 2025 and the commencement date of the amending Bill.