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.

The treasury laws amendment plays a crucial role in shaping the legislative framework surrounding the Foreign Resident Capital Gains Withholding Tax, affecting policy and compliance.

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.

This law, administered by the Australian Taxation Office (ATO), 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 must 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.

The knowledge condition relevant to transactions involving indirect Australian real property interests, such as company title interests, impacts tax obligations and necessitates clearance certificates in such transactions.

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).

2025 FRCGW Updates

The FRCGW rate and threshold will change from 1 January 2025. The rate will increase from 12.5% to 15%, and the $750,000 threshold will be removed. This means the 15% withholding will apply to all real property transactions with foreign residents, regardless of the property value.

Another significant change coming into effect from 1 July 2025 is broadening the CGT base for foreign residents. This change will affect assets with a close economic connection to Australian land and natural resources. Foreign residents must be aware of these expanded CGT implications when investing in or disposing of such assets.

The expanded CGT base is expected to include assets such as:

• Leases or licenses to use land in Australia
• Australian water entitlements related to land in Australia
• Infrastructure and machinery installed on Australian land (e.g., wind turbines, solar panels, mining machinery)
• Options or rights to acquire the above assets

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

Tax residency is a complex area of tax law. 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.

Early Tax Return Options

If you have had FRCGW withheld from your property sale proceeds, you may be eligible to submit an early tax return. This can allow you to claim a credit for the amount withheld sooner. You must have no other Australian assessable income and no outstanding tax returns or debts to be eligible. Consult with a tax professional to determine if this option suits your circumstances.

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 comply with Australian tax laws.
• Offer tailored advice based on your unique financial situation, ensuring you make the most informed decisions possible.

Key Takeaways

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. 

FAQs

Do Non-Residents Have to Pay Capital Gains Tax in Australia?

Yes, non-residents are required to pay capital gains tax (CGT) in Australia on certain assets. As a foreign resident, you are subject to CGT on “taxable Australian property,” which includes:

• Direct interests in Australian real estate
• Indirect interests in Australian real estate (e.g., shares in a company where the majority of its value comes from Australian real property)
• Assets used in carrying on a business through a permanent establishment in Australia
• Options or rights to acquire the above assets

What are the Changes to Foreign Resident CGT Rules?

Several changes to the foreign resident CGT rules have been proposed or implemented:

• From 1 January 2025, the Foreign Resident Capital Gains Withholding (FRCGW) rate will increase from 12.5% to 15%, and the $750,000 threshold will be removed.
• The CGT base for foreign residents is being expanded from 1 July 2025 to include assets with a close economic connection to Australian land and natural resources.
• The principal asset test period is changing from a point-in-time test to a 365-day period.
• Foreign residents disposing of shares or interests exceeding $20 million will need to notify the ATO before the transaction.

How to Avoid Capital Gains Tax on Overseas Property in Australia?

As an Australian resident, you may be liable for CGT on the sale of overseas property. Remember, tax laws are complex and subject to change. Always seek professional advice for your specific situation to ensure compliance with current regulations.

Disclaimer

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.