Feb 17, 2025 Joel Hernandez

Changes to impact property vendors

If selling property in Australia is on the horizon for you, the changes in the Foreign Resident Capital Gains Withholding (FRCGW) rules are something worth taking note of.

The FRCGW regime operates in a way that assumes you are a foreign tax resident unless proven otherwise via a clearance certificate. Therefore, Australian vendors face these changes too as the onus lies with them to prove residency to be excluded from the withholding.

FRCGW snapshot

Where a foreign resident disposes of certain Australian properties, the FRCGW applies a withholding tax to the purchase price of that property.

The rules apply to taxable Australian property namely:

• Vacant land, buildings – residential and commercial
• Mining, quarrying or prospecting rights where the material is situated in Australia
• A lease over real property in Australia if a lease premium has been paid for the grant of the lease

Currently, a 12.5% withholding rate is applied and only where the property is valued at $750,000 or more.

The changes

From 1 January 2025:

• The withholding rate will increase from 12.5% to 15%
• The $750,000 threshold will be reduced to nil. This means the withholding will apply to properties with any value.

Typically, it is the contract date that would be the relevant date to which the changes will apply.

Impact on Australian residents

The more notable change that impacts Australian residents is the removal of the $750,000 threshold. This would impose an obligation on every Australian resident vendor selling property in Australia to obtain a clearance certificate from the ATO.

ATO clearance certificate

An application for a clearance certificate can be submitted before entering into a contract for sale. As it may take up to 28 days for the ATO to process, it would be prudent to submit this application in time for the clearance certificate to be available by settlement date.

 Implications in the absence of a clearance certificate

If no clearance certificate is provided at settlement, the purchaser is required by law to withhold 12.5% (soon to be 15%) of the purchase price and pay this to the ATO.

The vendor will then have to wait until the time their tax return is lodged and  assessed by the ATO, to have this withholding amount applied to their capital gains tax liability (if any).

Are you an Australian resident for tax purposes?

It is imperative to understand that residency for tax purposes holds its own meaning, and may be different to your residency status for immigration purposes.

Holding an Australian passport, birth certificate or permanent residency visa does not necessarily make you an Australian resident for tax purposes.

There are a number of statutory tests applied by the ATO in determining tax residency and the ATO provides this decision tool to help you work this out.

Impact on Foreign residents

Cash flow

The increased withholding rate from 12.5% to 15% may seem minor from a percentage point of view, however with the increasing rise in property prices, this could translate into significant dollars.

If generating short term cash flow is the primary reason for selling your property, the impact of this change on the net proceeds received at settlement will need to be considered when making financial decisions.

Variation

There is still a way out for foreign residents who have reasons to believe that the ATO determined withholding rate should not apply to their transaction.

Foreign vendors who are anticipating a net capital loss, or have carry forward capital losses to apply, or who could use a CGT roll over relief may want to consider applying for a variation to the withholding rate.

Foreign vendors who are thinking of whether the main residence exemption could be applied should note that this exemption is no longer available to them for property sold after 30 June 2020, unless the life events test is satisfied.

Capital gains tax can be a complex area especially when there are questions around tax residency or related party transactions thrown in the mix. If you have any concerns about your tax obligations in this matter, please contact us and we will guide you through the process.