If you are buying or selling property in Australia, it is important to understand the changes to the Foreign Resident Capital Gains Withholding (FRCGW) regime. These changes will apply to contracts signed from 1 January 2025. These updates, recently passed by Parliament, could significantly impact property transactions. While this complicates property transactions for foreign residents, Zettle conveyancers will clarify the new rules and their impact on your situation.
What is the FRCGW Regime?
The FRCGW regime ensures that foreign residents pay tax on capital gains from the sale of Australian property. Under this system, buyers are required to withhold a portion of the sale price – currently 12.5% - when a foreign resident sells property. This withheld amount is sent directly to the Australian Taxation Office (ATO) as an advance towards the seller’s potential capital gains tax liability.
What is Changing?
As of 1 January 2025, the following changes will apply to property transactions:
- Increased Withholding Rate: The withholding rate will increase from the current 12.5% to 15%. This means buyers will be required to withhold a larger portion of the sale price at settlement.
- Removal of the $750,000 Threshold: The existing $750,000 threshold, which determines which properties were subject to FRCGW, will be removed. Starting January 2025, all taxable Australian real property will be subject to the FRCGW regime, regardless of the property’s value.
How will this affect Sellers and Buyers?
With these changes, both sellers and buyers need to be proactive to ensure compliance with the new rules and avoid penalties.
Seller
- Obtain a Clearance Certificate: Sellers must obtain a clearance certificate from the ATO early in the process. Without this certificate, buyers are legally required to withhold 15% of the purchase price at settlement.
- Stay Compliant: The increase in the withholding rate makes it even more important for sellers to ensure all requirements are met.
Buyer
- Verify FRCGW Applicability: Buyers should confirm whether the property they are purchasing is subject to the FRCGW regime.
- Check for Clearance Certificate: Buyers must ensure the seller has a valid clearance certificate. If not, be prepared to withhold 15% and remit it to the ATO.
What types of Property are Affected?
The FRCGW regime applies to:
- Taxable Australian Real Property: This includes both residential and commercial real estate.
- Indirect Interests in Australian Property: This includes shares in land-rich companies.
- Options or rights to Acquire Property: This includes any rights or options related to acquiring Australian real property.
How Zettle can help
Navigating the complexities of the FRCGW regime – especially with the upcoming changes - can be challenging. Zettle, with its expertise in property transactions, is here to help streamline the process for both buyers and sellers. Zettle ensures that all parties are fully compliant with the new FRCGW rules, minimizing the risk of penalties and ensuring a smooth transaction.
Frequently Asked Questions (FAQs)
Q1. What is a clearance certificate, and why do I need one?
A clearance certificate, issued by the ATO, confirms the seller’s status as an Australian resident for tax purposes. Without it, buyers must withhold 15% of the purchase price and remit it to the ATO.
Q2. How do I apply for a clearance certificate?
Sellers can apply for a clearance certificate online via the ATO’s website. The process requires details about the property and the seller’s tax residency status. It is recommended to apply as early as possible to avoid delays, as the ATO can take up to 28 days to process the application.
Q3. Will the new FRCGW changes apply to contracts signed before 1 January 2025?
No, these changes will only apply to contracts signed from 1 January 2025 onward.
Q4. What happens if I fail to comply with the FRCGW requirements?
Buyers who fail to withhold the required amount may face penalties and interest charges from the ATO. Sellers who do not obtain a clearance certificate risk having 15% of the purchase price withheld.
Q5. Can the withholding amount be varied?
Yes, sellers can apply for a variation if the standard 15% withholding is too high, for example, in cases of low capital gains or financial hardship. A variation must be approved by the ATO before settlement.
