Understanding the Implications of Changes to the Foreign Resident Capital Gains Withholding (FRCGW) Regime Effective from 1 January 2025

It is essential to ensure you are informed about the upcoming changes to the Foreign Resident Capital Gains Withholding (FRCGW) regime, which will impact all contracts for the sale of property entered into on or after 1 January 2025. These changes will have significant implications for both buyers and sellers in property transactions.

OVERVIEW OF THE FRCGW REGIME

The FRCGW regime is designed to assist the Australian Taxation Office (ATO) in collecting capital gains tax (CGT) from foreign residents selling taxable Australian property. Under this regime, buyers are required to withhold a portion of the purchase price and remit it to the ATO if the seller is a foreign resident for tax purposes. This ensures the ATO can recover any potential CGT liabilities before the funds leave Australia.

When selling or disposing of property in Australia, Australian residents for tax purposes must have a valid clearance certificate issued by the ATO.

The following taxable Australian real property requires a clearance certificate:

1.??? vacant land, buildings, residential and commercial property;

2.??? mining, quarrying or prospecting rights where they are situated in Australia;

3.??? a lease over real property in Australia; and

4.??? indirect Australian real property (IARP) interests, where the holder has a right to occupy land or buildings on land.

In addition, some real property-related assets, such as leases, shares that are indirect real property interests (IARPI) and options in those that are not listed on an official stock exchange, are also subject to FRCGW.

Finally, excluded transactions may include:

a)??? transactions through an approved stock exchange (eg, the Australian Stock Exchange) or those using a broker-operated crossing system;

b)??? transactions subject to another withholding obligation;

c)??? securities lending arrangements, as these do not cause a CGT liability;

d)??? transactions when a vendor is in external administration;

e)??? transactions from

(ii)?? a composition or scheme of arrangement;

(iii) a bankrupt estate

(iv) a debt agreement; or

(v)? a personal insolvency agreement, or same or similar circumstances under a foreign law.

KEY CHANGES EFFECTIVE 1 JANUARY 2025

The updated FRCGW rules apply to all contracts for property sales entered into on or after 1 January 2025. While the specific details of these changes may vary, the following aspects are typically impacted:

WITHHOLDING RATE

The old withholding rate of 12.5% has been adjusted under the new regime to 15% of the sale price. It is crucial to verify the applicable rate when finalising a property transaction.

THRESHOLD FOR APPLICABILITY

The old threshold, which exempts properties valued at $750,000 (market value) or less, is removed to enabling the withholding rules to apply to all property sales. This could result in more transactions being subject to withholding obligations.

IMPLICATIONS FOR SELLERS/ VENDORS

If you are selling property, you must ensure your residency status for tax purposes is accurately determined. If you are an Australian resident, you can apply for a clearance certificate from the ATO (irrespective of the value of the property), which must be provided to the buyer/ purchaser at or before settlement to exempt them from withholding obligations.

IMPLICATIONS FOR BUYER/ PURCHASER

If you are purchasing property, you are to ensure that the vendor provides you with a clearance certificate in time. If the vendor does not provide a valid clearance certificate and is a foreign resident, you must withhold the prescribed 15% of the purchase price (irrespective of the value of the property) and remit it to the ATO.

Purchasers who fail to withhold and remit the required amount may face penalties and interest charges from the ATO. It is critical to fulfill this obligation to avoid financial and legal consequences.

LEGAL ADVICE

Foreign resident sellers should seek advice from a tax adviser to understand the CGT implications of the sale and tax liabilities.

Consult with the IP House Lawyers at the outset of the transaction to understand your obligations and prepare the necessary documentation to address FRCGW compliance.

Stay informed about any changes to the withholding rate, thresholds, or administrative processes. The IP House Lawyers can assist in interpreting and applying these changes.

As your legal representative in conveyancing, we will keep detailed records of the transaction, including clearance certificates, remittance receipts, and correspondence with the ATO, to demonstrate compliance.

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For any further information or queries on the above content, please contact us.

The Author

Jean Kallmyr | Lawyer, The IP House Lawyers | t: 0435 799 831 | e: [email protected]

Key Contact

Claire Darby | Managing Director/Lawyer, The IP House Lawyers | t: 0412 998 951 | e: [email protected]

Disclaimer

The information and contents of this publication do not constitute any legal or financial advice. This publication is intended only for reference purposes for The IP House Lawyers’ clients and prospective clients.

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