Foreign resident capital gains withholding – the new and the practical ramifications

Current state of play

The Foreign Resident Capital Gains Withholding (FRCGW) rules were introduced in 2016 as a way to ensure that foreign residents pay tax on the sale of certain Taxable Australian Real Property (TARP). The obligation to withhold and remit an amount of FRCGW is the responsibility of the purchaser and arises where any vendor is a foreign resident. Generally, a vendor is assumed to be a foreign resident unless the purchaser is given a clearance certificate at or before settlement confirming that the vendor is an Australian tax resident. When the FRCGW regime was first introduced, the withholding rate was set at 10% but increased to 12.5% on 1 July 2017. The threshold for withholding was lowered from $2 million to $750,000 at that time as well. The FRCGW amount is a non-final payment of tax, meaning it will be credited to the account of the foreign resident vendor when calculating their final income tax position for the relevant income tax period.

What are the changes?

Commencing from 1 January 2025, the FRCGW rate increased from 12.5% to 15% and the $750,000 threshold is removed. This brings lower value property transactions into the FRCGW tax regime.

What TARP are subject to FRCGW?

TARP that are subject to FRCGW are real property situated in Australia (this can be strata unit, warehouse, residential dwelling, commercial property, vacant land etc.), leases over real property in Australia, mining, quarrying or prospecting rights in Australia and indirect Australian real property interests.

Who might be affected?

Australian resident vendors and lessors

Without a clearance certificate, a purchaser or lessee (as applicable) must withhold 15% of the property sale price/lease premium, and remit the amount withheld to the ATO on or before the settlement date for their purchase. The ATO stated publicly that it takes up to 28 days to process and issue a clearance certificate (and in certain circumstances the processing time may be extended). It is worth noting that a clear certificate is valid for 12 months from the issuance date and covers all properties sold/lease by the vendor in that 12-month period. So, to ensure the receipt of the full purchase price/lease premium, Australian tax residents selling their real property or who are intending to grant a lease with a lease premium should consider taking early action to secure a clearance certificate from the ATO.

Deceased estates

In the context of deceased estates, where real property owned previously by a deceased devolves to their executor/ legal personal representative (LPR), or passes to a beneficiary under their will, the rate of withholding is varied to nil by the legislative instrument. As a result, it is not necessary to apply for a clearance certificate for these transfers. However, in cases where an executor/LPR may be obligated by the terms of the will to sell the property and distribute the proceeds to the beneficiary the question arises as to whether the executor/LPR can apply for a clearance certificate?

Clearance certificates are only available to Australian tax residents. A deceased estate is a type of discretionary trust. Generally, a trust is considered an Australian resident for an income year if the trustee is a resident or central management and control of the trust is in Australia at any time during the income year. Where the executor/LPR of a deceased estate is a foreign resident, the deceased estate itself is treated as a non-resident. This is so notwithstanding that the deceased was an Australian tax resident. In this case the executor/LPR will not be entitled to apply for a clearance certificate such that FRCGW applies to the sale of the property. Nonetheless, the executor/LPR could apply to reduce the FRCGW rate from 15% to a lower rate if they believe that the estimated Australian tax liability on the property sale will be less than the full 15%. An example that comes to mind is where the property was the deceased’s main residence just before death and qualifies for main residence exemption (whether partial or full). Another example that may warrant a lower FRCGW rate is if the property previously owned by the deceased qualifies for a cost base step up equal to its market value on the day of death. This would arise, for example, if the property was a pre-CGT asset of the deceased, or alternatively was their main residence just before death and was not then being used for income producing purposes.

The application for a variation notice takes up to 28 days to process. In order for the purchaser to withhold an amount of FRCGW at a rate that is less than 15%, the purchaser must be given the variation notice by the settlement date.

Multiple vendors/lessors

Properties with multiple owners will prima facie be subject to the 15% FRCGW rate if sold or leased for a premium unless the purchaser/lessee receives the appropriate documentation from all vendors. Each vendor/lessor who is a tax resident of Australia must individually apply for and give to the purchaser their respective clearance certificate on or before settlement (or when the lease is executed). To the extent any of the co-owners are foreign residents, the purchaser will withhold 15% of the non-resident owner’s share of the full sale proceeds unless the purchaser receives a notice of variation confirming that a lower withholding rate applies.

Purchasers

Purchasers are responsible for withholding and remitting the FRCGW amount at a rate of 15% subject to obtaining a valid clearance certificate or variation notice. The onus is on the purchaser to check that the relevant document provided is valid, so they may seek to require any vendor to provide clearance certificates or variation notices some time prior to settlement to allow them to confirm validity and to make appropriate settlement arrangements. The ATO has provided a checklist on their FRCGW factsheet QC 103610 to assist with assessing the validity of a clearance certificate or variation notice receive from a property owner. The FRCGW amount must be paid to the ATO on the day of settlement. Failure to withhold when they required to do so or remit the amount withheld will result in penalties and interest being levied on the purchaser.

Whilst the FRCGW regime may seem straight forward, the practical ramifications outlined above suggest otherwise. As with any property transaction, good planning is essential to mitigate any undue tax compliance burden, liabilities and penalties.

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