New Capital Gains Withholding Requirements from 1 January 2025
Navigating the Australian property market can be complex, especially with recent changes to the Foreign Resident Capital Gains Tax withholding rules. Starting 1 January 2025, all sellers and lessors must be aware of the new requirements regarding withholding clearance certificates.
Key Modifications to the FRCGW Requirements
- Increase in Withholding Rate
The withholding tax rate will increase from 12.5% to 15% of the sale price.
- Elimination of the $750,000 Property Value Threshold
As of 1 January 2025, these provisions will apply to ALL property sales and leases, irrespective of their value.
Previously, only property transactions with a value of $750,000 or more were subject to the withholding requirements.
Implications for Australian Resident Sellers and Lessors
To avoid having 15% of the sale price withheld, all Australian resident vendors are required to obtain a clearance certificate from the Australian Taxation Office (ATO) prior to settlement.
About foreign resident capital gains withholding
Foreign resident capital gains withholding (FRCGW) applies to all (individual and non-individual) sellers selling or disposing of certain taxable real property (property).
When selling or disposing of property in Australia:
- Australian residents for tax purposes (Australian residents) must have a valid clearance certificate issued by us at, or before settlement. Without a clearance certificate, FRCGW must be withheld from the sale proceeds by the purchaser and paid to us.
- Foreign residents (also known as non-residents) may incur capital gains tax (CGT) on the sale of Australian property. Purchasers withhold FRCGW from the sale price and remit this to us to go toward payment of this liability. FRCGW must be withheld unless the foreign resident vendor has a variation notice specifying a reduced rate of FRCGW.
- Purchasers must pay any amount they withhold to us at, or before settlement.
The most common reasons for disposing of a property include selling and transferring to another person or entity, for more reasons see CGT events.
Types of assets
Taxable Australian real property requiring a clearance certificate include:
- vacant land, buildings, residential and commercial property
- mining, quarrying or prospecting rights where they are situated in Australia
- a lease over real property in Australia
- indirect Australian real property (IARP) interests, where the holder has a right to occupy land or buildings on land.
Other assets
Other types of real property-related assets, such as leases, shares that are indirect real property interests (IARPI) and options in those that aren’t listed on an official stock exchange are also subject to FRCGW.
Excluded transactions
Some transactions (due to the way they are sold or disposed of) aren’t subject to FRCGW. A list of CGT assets and exemptions can be located on the ATO website.
Consequences of Not Providing a Clearance Certificate
If an Australian resident vendor fails to furnish a clearance certificate by the time of settlement, the purchaser is legally obligated to:
- Withhold 15% of the property’s sale price; and
- Remit the withheld amount directly to the ATO.
Procedure for Obtaining a Clearance Certificate
The process for acquiring a clearance certificate is straightforward; however, it is imperative to act promptly.
- Application Process
Vendors may apply for a clearance certificate via the ATO’s online portal.
- Processing Times
The majority of clearance certificates are issued within a few days.
In certain instances, processing may take up to 28 days.
- Validity
Clearance certificates remain valid for 12 months from the date of issuance.
Vendors need not wait until they have signed a contract to initiate their application; early application ensures that the certificate is available when required.
Significance of These Changes
The removal of the property value threshold and the increase in the withholding rate necessitate that all sellers pay closer attention to their tax compliance responsibilities. This includes the importance of applying for a clearance certificate well in advance of settlement.
What is Your Next Step
All sellers of real property and all lessors of leases to either:
- attach a clearance certificate to the sale contract or lease; or
- provide a clearance certificate before settlement, to avoid the withholding obligation.
Entities can continue to apply for clearance certificates from the ATO to inform buyers of land or proposed retirement village residents that the seller is not a foreign resident in relation to an Australian real property transaction.
Conclusion: Ensuring Compliance with the New Withholding Rules
The modifications to the FRCGW requirements reflect the Government’s commitment to enhancing tax compliance in property transactions. With the elimination of the $750,000 threshold and the increased withholding rate, it is crucial for Australian resident vendors to proactively fulfill their obligations.
Key Takeaways
Understanding these new withholding rules is essential for foreign residents selling property in Australia. Here’s a recap of key takeaways:
- Every seller or lessor must obtain a withholding clearance certificate starting 1 January 2025.
- Failure to comply can result in significant penalties and complications.
- Seek professional advice to navigate the new regulations effectively.
Staying informed about future updates ensures you remain compliant in the evolving landscape of Australian tax law. Awareness and preparation are vital for a smooth property transaction experience.
By applying for clearance certificates promptly and remaining informed, vendors can navigate these changes effectively and mitigate potential delays or financial repercussions. Should you have inquiries regarding the impact of these changes on your circumstances, it is recommended that you consult with your A.L.F Lawyers conveyancing professional or tax advisor.
If you are considering selling or leasing, our team of experienced and friendly residential conveyancing and commercial legal professionals are here to help. Reach out to us today on 07 3088 6161!
Disclaimer. The legal content contained in this article has been provided for general interest only. It does not constitute legal advice.
