Understanding Australian Capital Gains Withholding (FRCGW)
Foreign Resident Capital Gains Tax Withholding (FRCGW) needs to be paid on the sale of a taxable Australian real estate. It applies to you if you are a foreign resident, as determined by your tax residency status. This tax applies to all assets sold for a profit including stocks, bonds, precious metals, and real estate. The current capital gains withholding rate is 12.5% for properties with a market value of $750,000 or higher.
It’s important to note that tax residency can differ from actual residency. So, it’s crucial to determine your tax residency status to avoid any accidental violations of tax laws. For example, Australian citizens living and earning abroad can be considered foreign residents for tax purposes because they don’t pay income tax in Australia.
Foreign residents must pay CGT in Australia on taxable property when they sell it. Additionally, they are not eligible for the 50% CGT discount for property acquired after May 2012. They can not claim the CGT principal residence exemption either. The CGT rules can change if a foreign resident becomes an Australian resident or vice versa. Australian residents are exempt from this tax, but they must apply for their exemption separately.
At the end of the tax year, the foreign resident vendor must lodge a tax return. They will need to declare their total capital gains and Australian assessable income. They will need a Tax File Number (TFN) if they don’t have one already. The vendor may then claim credit for any withholding amount paid to the ATO.
Who Qualifies as a Foreign Resident?
To determine if you’re a foreign resident, ask yourself if you pay income tax in any country other than Australia. This means that if you decide to sell property back in Australia, the Australian Taxation Office (ATO) will classify you as a foreign resident for tax purposes.
The withholding tax only applies to foreign vendors. So, if you are an Australian citizen purchasing property in Australia while living abroad, you only need to worry about the vendor’s residency.
What do I need to do to check if I'm required to pay FRCGW?
If you are buying taxable Australian real estate, you need to know if the vendor is a foreign resident for tax purposes. A foreign resident is determined by their tax residency status, which can differ from actual residency. ATO determines your tax residency through their predetermined tests.
All Australian residents can obtain a clearance certificate and provide it to the purchaser by the settlement date. If the vendor cannot provide a valid certificate, the purchaser must withhold 12.5% of the purchase price. If the property is being purchased from multiple vendors and one of them is a foreign resident, the FRCGW still applies.
The purchaser must also satisfy the “knowledge condition”. This means that the purchaser must have reasonable grounds to believe that the vendor is a foreign resident. Or, have reasonable doubt that the vendor is not an Australian resident. To satisfy the knowledge condition, you must have a record that suggests the vendor has an overseas address or made a payment outside of Australia.
How does the ATO view Australian expats?
Expats living abroad, if identified as foreign residents for tax purposes, are impacted by Foreign Resident Capital Gains Withholding (FRCGW) tax when they sell their property. They also lose eligibility for the main residence exemption on Capital Gains Tax.
However, they may be able to avoid the withholding tax by obtaining a clearance certificate or a variation certificate. However, they qualify for these certificates only when they are not making a capital gain on the transaction. This means they lose money during the sale. The ATO will consider each case individually, so applying may have its merits.
What Are the FRCGW Rules?
The foreign resident capital gains withholding tax (FRCGW) is a responsibility shared between the vendor and the purchaser. If the vendor is considered a foreign resident for tax purposes, the purchaser is obligated to withhold 12.5% of the purchase price. They need to send the withheld amount to the Australian Taxation Office (ATO).
FRCGW is applicable to:
- Vacant land
- Residential or Commercial property
- Mining, Quarrying, or Prospecting rights if the material is in Australia
- Leases over a property
- Indirect real property interests such as shares in a company that owns Australian real estate
The tax applies when a purchaser buys a CGT asset from one or multiple vendors, at least one of whom is a non-resident.
Australian residents for tax purposes can avoid the withholding tax by applying for a clearance certificate. If the vendor is unable to provide a valid clearance certificate, the purchaser must withhold 12.5% of the purchase price for the Australian Taxation Office (ATO).
The Penalties of Non-Compliance
Non-compliance with the Foreign Resident Capital Gains Withholding (FRCGW) tax results in penalties for both the vendor and the purchaser. If the vendor fails to obtain a clearance certificate, they may lose the 12.5% withheld amount until the next financial year. However, there is no legal retribution.
On the other hand, if the purchaser fails to withhold the amount, they may face a penalty of $2,100 imposed by the ATO and may also be forced to pay the withheld amount themselves. It is important for the purchaser to ensure the validity of the clearance certificate to avoid penalties.
Which Assets Are Excluded from the Withholding Tax?
The following assets are not subject to the withholding tax:
- Taxable Australian real property with a market value less than $750,000
- An indirect Australian real property interest with a market value less than $750,000
- Transactions made through an approved stock exchange (excluding property transactions)
- Property transactions that are already subject to another withholding obligation
- Securities lending arrangements, which are exempt from CGT for the vendor
- Transactions where the foreign vendor is bankrupt, in debt, or under a personal insolvency agreement under foreign law.
Do the Rules Apply if the Asset's Market Value is Exactly $750,000?
The withholding tax applies to all properties with a market value of $750,000 or higher. If the purchase price is not yet determined or will be sold at auction, the vendor may apply for a clearance certificate as a precaution. If the property price is slightly above the threshold and the vendor is an expat, they may choose to lower the asking price to avoid the withholding tax.
Can I claim back the capital gains withholding tax?
Yes, a foreign vendor who has paid the Foreign Resident Capital Gains Withholding (FRCGW) tax of 12.5% on the sale of a taxable Australian real property can claim back the tax paid through their tax returns. However, the process of claiming back the tax may vary depending on the vendor’s residency status and tax obligations in Australia and their home country.
It is recommended to seek the advice of a tax professional to determine the specific steps and eligibility for claiming back the FRCGW tax.
The Odin Tax team has years of experience in helping Australian expats and non-residents comply with the ATO regulations. Get in touch today to discuss your situation.
Frequently Asked Questions
An ATO Clearance Certificate is a document that proves you are an Australian tax resident. If your property is valued at more than $750,000, you will need to apply for this certificate to avoid having 12.5% of the sale proceeds withheld by the purchaser.
An Australian resident needs a Clearance Certificate to show the buyer that they are not a foreign resident. Without a certificate, the buyer is required to withhold 12.5% of the purchase price and pay it to the ATO.
Applications for an ATO clearance certificate usually takes around 28 days to clear. Unusual circumstances may prolong the process.
If you sell an asset in Australia for a profit, you will be required to pay Capital Gains Tax, unless you are eligible for an exemption. For example, if you are an Australian resident and have owned the property for over 12 months and it is your primary residence, you may be partially exempt from Capital Gains Tax.
Market value is the estimated price a property would sell for in a competitive market, often used as a proxy for the purchase price. The ATO considers the negotiated price between vendor and purchaser as market value if negotiations are at arm’s length, but a separate professional valuation may be needed in private sales.
The market value is the price before adjustments such as council rates and strata levies, and the $750,000 threshold should be applied before these adjustments.
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