Are you a foreign tax resident planning to sell Australian property soon? Since 1 Jan 2025, the rules around Foreign Resident Capital Gains Withholding (FRCGW) in Australia have changed.
It’s crucial to be aware of these updates as they impact the amount of tax you must pay the Australian Taxation Office(ATO) on your property sale.
What Is FRCGW, and Who Is Affected by It?
The FRCGW regime was introduced in 2016 to help the ATO collect tax from foreign tax residents who sell Australian property exceeding $2 million. This required the property buyer to withhold 10% of the sale price as tax, regardless of whether the seller was a foreign resident.
From 1 July 2017, the FRCGW threshold lowered to $750,000, and the tax rate increased to 12.5%. However, this withholding could be avoided if the seller provided a clearance certificate confirming their Australian residency status before finalising the sale.
Due to the high transaction value threshold, the above rule impacted only a certain number of property sales until 2025. This was applicable until December 2024, before the change in January, which we’ll discuss in the next section.
How Does FRCGW Work?
FRCGW essentially works as an advance payment on your Capital Gains Tax (CGT). Note that it’s not a separate tax. It’s simply a way to ensure the ATO receives a portion of your CGT liability upfront.
When selling property without a valid clearance certificate, the buyer of your property must withhold a portion of the sale proceeds and remit it to the Australian Taxation Office. This provision reduces the cash you receive at the time of sale.
If the withheld amount exceeds your actual CGT liability, you can claim a refund when lodging your next income tax return. FRCGW facilitates an early settlement of a portion of your CGT liability, with the ATO refunding any excess.
New FRCGW Changes Effective From January 2025
Starting 1 Jan 2025, there are big changes to how taxes are collected on property sales in Australia. Until December 2024, a 12.5% withholding rate applied to property sales valued at $750,000 or more. The new FRCCW changes are as follows.
- Higher Tax Rate: The tax withheld from property sales will now be 15%, up from 12.5%.
- No Threshold: This tax now applies to all property sales, not just those over $750,000.
These changes aimed to ensure a more equitable and effective tax collection system.
FRCGW Changes Effective From January 2025: Examples
| Property Sale Price | FRCGW Before 1 Jan 2025 | FRCGW From 1 Jan 2025 |
|---|---|---|
$500,000 | $0 (Nil) | $75,000 |
$750,000 | $93,750 | $112,500 |
$1,000,000 | $125,000 | $150,000 |
$2,000,000 | $250,000 | $300,000 |
Examples of FRCGW before and from January 2025
How Does The 2025 Change Impact You?
If you’re a foreign tax resident selling Australian property after 1 January 2025, you face a higher withholding rate that will significantly increase the amount withheld from your sale proceeds.
- Significant Withholding: You’ll be required to withhold a substantial portion of the sale price, 15%, which can create a significant financial burden.
- Delayed Access to Funds: This withheld amount will be held by the ATO until you file your next tax return and it’s processed, potentially causing delays in accessing your funds when you need them, such as for purchasing a new home or other expenses.
Note: While designed to ensure non-residents pay their tax obligations, these FRCGW rules apply to all property sellers, not just foreign tax residents. Therefore, obtaining a clearance certificate is essential for all Australian tax residents selling their property.
Can I Reduce My Foreign Resident Capital Gains Withholding?
Yes, you may be able to reduce your FRCGW. Being a foreign tax resident selling Australian property doesn’t automatically mean losing 15% of your sale proceeds.
You can potentially reduce this amount by applying for a variation notice with the ATO. However, the ATO prioritises up-to-date tax returns for consideration. Let’s consider two situations.
Scenario A: No Variation
- Condition: You have outstanding tax returns and cannot apply for a variation.
- Withholding: Your buyer will withhold the full 15% of the sale price and pay it to the ATO.
- Outcome: You won’t have access to this withheld amount until you file your outstanding tax returns and your tax liability is assessed.
- Solution: Submit your tax return by the end of the financial year and complete the CGT for refund or pay additional tax.
Scenario B: You Apply for a Variation
- Condition: Your tax affairs are in order, and the ATO approves your variation request.
- Withholding: Your buyer will only withhold less than 15% upfront. For example, if the approved rate is 10% on a $500,000 sale with completed CGT calculations, only $50,000 will be withheld instead of $75,000, providing you immediate access to the remaining amount.
- Outcome: You have more immediate access to your funds as you make less upfront payments. Moreover, When you lodge your tax return, your actual tax liability will be calculated. If your tax liability is less than the withheld amount, you’ll receive a refund. If your tax liability is higher, you’ll owe the difference to the ATO.
- Solution: Apply for the withholding variation, but your tax record must be up-to-date.
Example: A Sale of Property Worth $750,000
If you don’t apply for a variation notice or your tax affairs are not up-to-date, the 15% FRCGW rate applies to you. On a $750,000 property, this means $112,500 will be withheld by the ATO until you file your next tax return.
However, if you’re up-to-date with your taxes and the ATO approves your variation request, you can negotiate a lower withholding rate. For example, if the approved rate is 10%, the buyer will only withhold $75,000 and pay to the ATO. This leaves you with $37,500 more upfront.
When you lodge your tax return, your actual tax liability will be calculated. If you’ve overpaid, you’ll receive a refund. If you owe more, you must pay the difference to the ATO.
Therefore, maintaining up-to-date tax records is crucial for maximising your funds and minimising potential delays in accessing your proceeds from the property sale.
How to Obtain the Withholding Variation as a Tax Non-Resident
Step 1: Get Your Taxes Up-to-Date
Before pursuing a withholding variation, it’s essential to have your Australian tax affairs in order.
If you’re unsure about your tax obligations or past compliance, consider utilising Odin’s free ATO tax health check. We help you identify any outstanding tax liabilities or potential issues that could hinder your withholding variation application.
After the ATO health check, you get a personalised plan to bring your Australian taxes up-to-date.
Step 2: Complete CGT Calculation and Apply for the Variation to Reduce the Withholding Rate
Determine your capital gains or losses on the relevant Australian property. Consider factors like purchase price, selling price, holding period, and allowable deductions (e.g., capital works, agent fees).
If you have incurred capital losses in other Australian investments, you can offset these losses against your capital gains, potentially reducing your overall tax liability and the required withholding amount.
If your calculated CGT liability is less than 15% of your property sale, you may be eligible for a withholding variation.
Then, you can fill in and lodge the Foreign Resident Capital Gains Withholding Variation Application form with the ATO as early as practical. It can take 28 days to process. To ensure the reduced withholding rate occurs, you must provide the purchaser with an ATO-issued withholding variation notice on or before the settlement date of your property sale.
Note: If your CGT liability exceeds 15%, you generally cannot obtain a variation. In such cases, the standard 15% withholding rate will apply.
Step 3: Get the FRCGW Variation Notice and Provide It to Your Solicitor
If your withholding variation application to the Australian Taxation Office is approved, you’ll receive a Foreign Resident Capital Gains Withholding (FRCGW) Variation Notice.
Share this official notice with your solicitor or conveyancer. This document is crucial during the property settlement process to ensure the correct withholding amount is deducted.
By following these steps, you’re on track to get a lower withholding rate, letting you have more cash upfront during your property sale.
Reduce Your AU Property Capital Gains Withholding With Expert Help
The revised FRCGW rules have a significant impact on foreign tax residents involved in property transactions.
However, you can maximise your overall financial return from the sale and reduce the withholding by ensuring your tax affairs are in order before selling your property.
Take advantage of our free ATO tax health check. We review your tax history and provide a personalised plan to minimise your tax liabilities while selling property from overseas. Take the first step towards a smoother and more profitable property sale.
FAQs about Foreign Resident Capital Gains Withholding 2025
What is the foreign resident withholding tax in Australia?
The Foreign Resident Capital Gains Withholding (FRCGW) is a tax withheld from the sale of certain Australian assets by foreign residents. It ensures they pay their capital gains tax obligations to the Australian government.
Key Changes Effective 1 Jan 2025:
- Rate Increase: From 12.5% to 15%.
- Threshold Removal: This applies to all property sales, not just those over $750,000.
This means a 15% withholding will apply to all real property transactions with foreign residents, regardless of the property value.
Can I reduce foreign withholding tax?
Yes, you may be able to reduce your foreign withholding tax if your tax affairs are up-to-date. The ATO may approve your request to reduce the withholding rate to below 15%. This way, your tax liability will be lower.
By paying less upfront, you have more immediate access to your funds. If your tax liability is lower than the withheld amount, you’ll receive a refund from the ATO.
When should I start getting help for reducing my FRCGTW?
Ideally, start discussing your options with a tax professional like Odin Tax before signing a contract to sell your Australian property. This allows us to:
- Assess your specific situation and potential eligibility for a withholding variation.
- Identify any potential tax implications and explore strategies for minimizing your CGT liability.
- Guide you through the process and ensure a smooth application.
How long will the whole process of reducing FRCGW rate take?
To optimise your chances of reducing your Foreign Resident Capital Gains Withholding Tax (FRCGTW), it’s crucial to seek professional guidance early in the process.
Ideally, you should consult with a tax specialist before signing a contract to sell your Australian property. This proactive approach allows for a thorough assessment of your specific situation, identification of potential tax implications, and exploration of strategies to minimize your Capital Gains Tax (CGT) liability.
The timeline for obtaining a withholding variation typically involves an initial free tax health check, tax lodgment, and CGT calculation before the property sale.
Then, the withholding variation application is prepared and submitted to the Australian Taxation Office (ATO). The ATO usually processes these applications within one to four weeks.
By seeking expert assistance early on, you can increase your likelihood of securing a reduced withholding rate, ensuring a smoother and more efficient property sale.
Can I obtain a clearance certificate?
No, you can obtain a Clearance Certificate only if you’re an Australian tax resident selling property.
It isn’t available for foreign tax residents.
