Guide to Foreign Resident Capital Gains Withholding for property investments
.
When selling Australian property as a foreign owner, you’ll need to follow specific tax rules. The Australian Taxation Office (ATO) requires foreign residents to pay Capital Gains Tax (CGT) on profits from property sales.
Under current laws, buyers must hold back a portion of the sale price when purchasing from foreign sellers. This system, called Foreign Resident Capital Gains Withholding (FRCGW), ensures tax compliance before sale completion. Starting in 2025 these rules will change – the withholding rate will increase and apply to all property transactions, regardless of price.
Get tailored advice on managing your tax obligations correctly by booking a consultations with TMS Financials.
What happens under Foreign Resident Capital Gains Withholding (FRCGW)?
Foreign Resident Capital Gains Withholding (FRCGW) protects Australia’s tax revenue from property sales by foreign residents. Under current rules, buyers must withhold 12.5% of the purchase price when buying such property worth $750,000 or more from a foreign resident. This amount goes directly to the Australian Taxation Office (ATO). Under the treasury laws amendment, starting 1 January 2025, new changes will increase the withholding rate to 15% and remove the $750,000 threshold, meaning FRCGW will apply to all property sales by foreign residents.
Australian residents can avoid FRCGW by getting a clearance certificate from the ATO. These certificates stay valid for 12 months and prove the seller isn’t subject to the withholding requirements. Property sellers should apply for their certificate well before settlement and prepare any needed documents, particularly when claiming exemptions like the main residence exclusion. The ATO reviews all applications through their standard consultation process to ensure compliance.
When does tax residency status impact your taxes?
Your status as an Australian tax resident shapes your entire tax picture. Australian residents pay tax on all their income worldwide, including money earned overseas. However, non-residents only pay Australian tax on income they earn within Australia, like rent from property or returns on local investments. This difference particularly affects foreign investors and expatriates who own Australian property. Non-residents face specific rules when selling property, including Foreign Resident Capital Gains Withholding (FRCGW). Meanwhile, Australian residents can access tax benefits like the main residence exemption, which can reduce or eliminate Capital Gains Tax (CGT) on home sales.Your residency status determines which rules apply to you, making it essential to know where you stand before making financial decisions.
Steps on how to apply for withholding clearance certificate
A withholding clearance certificate helps sellers avoid or reduce Foreign Resident Capital Gains Withholding (FRCGW) on their property sales. You can submit your application through the Australian Taxation Office (ATO) online portal or work with a tax agent. To complete the application, provide:- Your Tax File Number (TFN)
- Proof of Australian tax residency
- Details about the property being sold
When do you need a withholding rate variation?
Foreign property sellers may qualify for a lower withholding rate when their expected tax liability falls below the standard rate. The Australian Taxation Office (ATO) can adjust your withholding rate if you meet specific conditions and provide proper documentation. Consider applying for a variation if:- Your property sale creates minimal or no capital gain
- You qualify for deductions or the main residence exemption
- Your property’s secured debts exceed what you’ll receive from the sale
- You purchased the property before Capital Gains Tax started on 20 September 1985
Case study: How a foreign resident reduced their withholding rate
Grace, a foreign resident, owns a taxable Australian real property valued at $800,000. Under Foreign Resident Capital Gains Withholding (FRCGW) rules, buyers must withhold 12.5% of the sale price and send it to the Australian Taxation Office (ATO). While this ensures foreign residents pay their Capital Gains Tax (CGT), Grace expects to make only a small profit after accounting for her property costs and deductions.Scenario
To avoid excess withholding under the standard foreign resident capital gains withholding rate, Grace applies for a withholding rate variation. She submits documentation about her taxable Australian property’s CGT base, income tax return history, and sale-related deductions. After reviewing her application, the ATO approves a reduced withholding rate of 6%.Outcome
When selling the property, the buyer withholds $48,000 (6%) instead of the standard $100,000 (12.5%). This lower amount better matches Grace’s expected income tax liability and improves her cash flow while waiting to file her tax return.Implications
At settlement, the buyer withholds $48,000 (6% of the purchase price) instead of the standard $100,000 (12.5%). This lower withholding amount better matches Grace’s expected Capital Gains Tax (CGT) liability on her taxable Australian real property and company title interests.How TMS Financials helps with your foreign resident capital gains withholding
Managing Foreign Resident Capital Gains Withholding (FRCGW) requirements can be complex, but TMS Financials simplifies the process. Our team ensures compliance with Australian tax laws, whether you’re dealing with taxable Australian real property, withholding clearance certificates, or withholding rate variations. We provide expert guidance to make property transactions involving foreign residents as seamless as possible.Our services include:
- Obtaining withholding clearance certificates, helping Australian residents and eligible sellers eliminate or reduce withholding tax obligations.
- Withholding rate variations, preparing applications to align the FRCGW rate with the actual taxable capital gain or loss on relevant CGT assets.
- Tax compliance support, keeping you updated on changes, such as the 2025 increase in the FRCGW rate and removal of the withholding threshold for transactions involving taxable Australian property.
Next step is to contact TMS Financials
TMS Financials provides you with a team of experienced professionals that help you achieve your financial goals through smart tax structures and strategic financial structuring. We’re a one-stop shop for all financial needs and pride ourselves on building strong partnerships with our clients.
Book a free financial health review to see the difference we can make in your financial future.
Book a Consultation
Disclaimer
This outline is for general information only and not as legal, tax or accounting advice. It may not be accurate, complete or current. It is not official and not from a government institution. Always consult a qualified professional for specific advice tailored to your unique circumstances.
Related Articles
How high-income earners can boost their super through salary sacrifice
How high-income earners can boost their super...
Using the downsizer super contribution: A guide for homeowners over 55
Using the downsizer super contribution: A guide...
How high-income earners can benefit from voluntary super contributions
How high-income earners can benefit from...
Contact Us
Tax Insights & Business Advice
Receive only the guidance that matters. Subscribe now for personalised tips and expert advice, directly suited for you and your business.