Changes to Foreign Resident Capital Gains tax Withholding (FRCGW) regimes announced

Changes to Foreign Resident Capital Gains tax Withholding (FRCGW) regimes announced

The Commonwealth Government has recently unveiled substantial modifications in its Mid-Year Economic and Fiscal Outlook report, released on December 13, 2023. Among the notable changes is the adjustment to the Foreign Resident Capital Gains Withholding regime. Specifically, the tax rate under FRCGW will see an increase from 12.5% to 15%, coupled with a reduction in the withholding threshold from $750,000 to $0 for real property disposals entered into from January 1, 2025.

The existing FRCGW framework, implemented since July 1, 2016, applies to foreign resident vendors disposing of specified taxable property, including real property valued at $750,000 or more and other assets like indirect Australian real property interests in Australian entities. The objective is to ensure accurate collection of foreign residents’ Australian tax liabilities by the Australian Taxation Office (ATO). In cases where there are multiple vendors in a sale, only one foreign resident vendor is sufficient for the FRCGW regime to take effect.

Presently, purchasers are obliged to withhold 12.5% of the property’s purchase price from the vendor, remitting it to the ATO instead. Purchasers must pay the FRCGW tax to the ATO if, at the time of purchase, they know or reasonably believe the vendor is a foreign resident.

Nevertheless, the purchaser is exempt from withholding if the vendor provides a written declaration affirming Australian residency, and the purchaser is unaware of any false statements. Similar exemptions apply for declarations regarding membership interests and indirect Australian real property interests.

Australian vendors can avoid the 12.5% withholding by presenting a clearance certificate obtained from the ATO before settlement, certifying their Australian residency. Failure to obtain such a certificate prompts the vendor to claim a credit for the withheld amount in their subsequent income tax return.

Foreign resident vendors can seek a variation of the withholding rate, potentially reducing it to nil under specific circumstances, such as anticipating a capital loss on the property sale.

Effective January 1, 2025, for real property sale contracts, the withholding rate increases to 15%, and the threshold becomes nil, departing from the previous $750,000 requirement. The Government aims to enhance housing affordability for Australians and ensure better compliance with tax obligations for foreign residents, anticipating a $150.5 million increase in receipts.

These alterations could have significant financial implications for foreign residents selling property in Australia, potentially resulting in substantial losses based on the revised withholding rate and threshold. For further details on the implications of these changes or if you require assistance in obtaining your clearance certificate, please reach out to Excelsior Tax Advisory’s Taxation Law team.