What is Foreign Resident Capital Gains Withholding?

Foreign Resident Capital Gains Withholding

The Federal Government's Mid-Year Economic and Fiscal Outlook report, released on 13 December 2023, has introduced pivotal changes that will significantly impact the real estate sector in Australia. Among the most notable amendments are those made to the Foreign Resident Capital Gains Withholding (FRCGW) regime. This blog aims to dissect these changes, elucidate their implications, and offer guidance to property vendors and purchasers navigating the evolving landscape of real estate taxation in Australia.

What is Foreign Resident Capital Gains Withholding (FRCGW)?

Introduced in 2016, the FRCGW was initially applied to real estate transactions over $2 million. This regime mandated a 10% capital gains withholding tax to be retained by the purchaser, irrespective of the vendor’s residency status, unless a qualifying clearance certificate was produced before settlement. Initially affecting a minimal number of transactions, the FRCGW saw significant changes in 2017. The threshold for transactions subject to FRCGW was lowered to $750,000, and the tax rate was increased to 12.5%.

These changes meant that all vendors selling property over $750,000 had to prove they were not foreign residents, significantly impacting a larger number of transactions. Compliance with these rules became a priority for vendors and their conveyancers. The clearance certificate, obtainable online from the Australian Taxation Office (ATO), is a critical document in these transactions, and vendors must apply for it early enough to avoid delaying settlement.

The requirement for a Foreign Resident Capital Gains Withholding Clearance Certificate applies to all vendors, regardless of whether they are Australian citizens or foreign residents, for sales of $750,000 and above. This emphasises the importance of understanding and complying with FRCGW regulations for all parties involved in property transactions in Australia.

What is the Capital Gains Tax in Australia for Foreign Residents?

Capital Gains Tax (CGT) in Australia, particularly for foreign residents, has evolved since the introduction of the FRCGW. Originally set at 10% for transactions over $2 million, the CGT was applied as a withholding tax during property sales. This rate increased to 12.5% in 2017, broadening its scope to include properties valued over £750,000. The latest changes, effective from 1 January 2025, further adjust this rate to 15%, significantly impacting foreign residents and Australian citizens alike. This adjustment is a clear indicator of the government's proactive stance in ensuring tax compliance in real estate transactions and its commitment to maintaining fairness in the property market.