What is the Foreign Resident Capital Gains Withholding Tax?
In the realm of property investment, the laws of taxation apply universally, whether you’re a local dweller or a foreign resident. Capital Gains Tax (CGT), imposed on the profit from the sale of an investment, is no exception.
This tax rule applies as much to international investors in Australian property as it does to domestic investors.
Foreign Resident Capital Gains Withholding is a particular segment of Australian taxation law that places the responsibility on the buyer, a departure from the more traditional seller-oriented tax obligations.
Instituted by the Australian Taxation Office (ATO), this law ensures that foreign residents meet their tax obligations, adding an additional layer of consideration for international property transactions.
It’s imperative for investors, both foreign and domestic, to gain a solid understanding of this regulatory requirement to navigate the tax implications during property transactions effectively.
Understanding Capital Gains Tax
When you sell an asset for more than its original cost, your profit is called a capital gain. Capital Gains Tax (CGT) is generally applied to these profits in Australia.
There are, however, a few exemptions.
For example, you’re not usually required to pay capital gains tax if you sell your main residence or the residence you primarily live in. So, in essence, those who generate an income from the sale, such as property investors, are liable for CGT.
To calculate the capital gain, you need to compare the asset’s selling price with its original cost or cost base. Here’s a simple calculation breakdown:
- Capital Gain = Selling Price – Cost Base
Remember that any costs associated with acquiring, holding, or disposing of the asset can be included in the cost base.
Another thing to note is that capital gains tax isn’t a separate tax but rather forms part of your annual income tax. So, it gets added to your taxable income for the year, and the Australian Taxation Office (ATO) taxes the amount at your marginal income tax rate.
For more information on how CGT works and what exemptions or concessions are available, you can read our guide on capital gains tax for property investments.
How Does Capital Gains Tax Impact Foreign Property Owners
As we mentioned earlier, foreign investors aren’t exempt from capital gains tax if they choose to invest in property in Australia.
However, the process of paying CGT works slightly differently as the ATO has introduced the foreign resident capital gains withholding rule.
What is Foreign Resident Capital Gains Withholding?
Foreign Resident Capital Gains Withholding (FRCGW) is a tax implication for foreign residents who own property in Australia.
When a foreign resident sells their taxable Australian real property, a certain percentage of the sale value is withheld and remitted to the ATO. This withholding tax ensures that foreign residents pay their fair share of tax on any capital gains from selling Australian property.
Initially introduced in 2016, the rule now requires anyone buying property worth $750,000 or more from a foreign resident to withhold 12.5% unless the seller provides a withholding clearance certificate (see discussion below).
Who is a Foreign Resident for Tax Purposes?
If you are a foreign resident for tax purposes, you are not considered an Australian resident.
Some factors to consider when determining your residency status include the following:
- Your nationality and visa status
- Duration and purpose of your stay in Australia
- Your family, employment, and social ties to Australia
Consulting with a tax professional is highly recommended if you are unsure of your residency status for tax purposes.
What is a Withholding Clearance Certificate?
A Withholding Clearance Certificate is a document that foreign property owners can apply for from the ATO to prevent or reduce the amount withheld from the sale of their property.
You should apply for a WCC if:
- You are an Australian tax resident or citizen living overseas
- You are a foreign resident who is exempt from capital gains tax withholding.
If you want to apply for the certificate, you can do so on the ATO’s website or have your tax agent do it on your behalf. Once you’ve submitted the application, you should receive your certificate within 28 days.
The ATO, however, processes these applications according to a first-come, first-served policy. You should submit your application well before your settlement date to avoid being penalised.
Certificates are valid for 12 months and can be used for multiple property sales. After it expires, you’ll have to apply for a new one.
Remember, these clearance certificates are only available to Australian residents. So, if you’re purchasing a property from foreign residents, you must withhold 12.5% tax from the property’s purchase price.
Applying for a Variation
Vendors who are foreign residents can apply for a variation of the withholding rate or declare that a membership interest doesn’t equate to an indirect Australian real property interest, which would, therefore, not be subjected to withholding.
What are the Grounds for Variation?
An application for alteration can be made under these conditions:
- The transaction doesn’t result in a capital gain for the vendor
- The vendor has no income tax liability
- A vendor’s creditor has a mortgage or secured interest on the property, and the sale proceeds are insufficient to cover both the withholding amount and the debt secured against the property
- A creditor becomes the property owner (that is, they make the purchase) due to foreclosure.
If the vendor fails to apply for a variation on or before the settlement, the buyer must withhold 12.5% of the purchase price for transactions exceeding $750,000.
The vendor must then file an income tax return and:
- request a credit for the amount withheld
- report their capital gain (reporting a value of ‘0’ if there’s no capital gain or if a capital loss occurred).
Why You Should Consider Seeking a Tax Agent’s Help
When dealing with foreign resident capital gains withholding , it can be beneficial to enlist the help of a tax agent. They can guide you through the complexities of the tax system and ensure you remain compliant with Australian regulations.
A tax agent can also:
- Assist with obtaining a Foreign Resident Capital Gains Withholding Clearance Certificate
- Keep you up to date with any changes to tax rates and regulations, helping you stay in compliance with Australian tax laws.
- Offer tailored advice based on your unique financial situation, ensuring you make the most informed decisions possible.
As a foreign resident dealing with property in Australia, it’s essential to understand the foreign resident capital gains withholding (FRCGW) tax.
Here are the key points you need to remember:
- The FRCGW applies to foreign residents selling or disposing of Australian real estate property worth $750,000 or more. It ensures that the ATO collects tax on any capital gains from these transactions.
- The FRCGW tax rate is 12.5%.
- Australian residents can eliminate FRCGW by obtaining a foreign resident capital gains withholding clearance certificate. This certificate lets the buyer and ATO know that the FRCGW tax doesn’t apply to that particular property sale.
In summary, the foreign resident capital gains withholding tax ensures that the Australian government receives its share of tax from foreign residents disposing of Australian property.
If you’re still unsure of how the withholding rule applies or if you would like tailored tax advice for your property investment, contact Property Tax Specialists today.
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.