The Foreign Resident Capital Gains Withholding Tax applies to foreign residents selling or disposing of Australian real estate property. It ensures the Australian government collects tax on any capital gains from these transactions.
Significant changes are on the horizon for the Capital Gains Withholding tax regime in Australia, set to take effect from 1 January 2025. These changes will have substantial implications for all property transactions, regardless of purchase price or vendor residency status.
Under the current regime, purchasers are required to withhold 12.5% of the property purchase price and pay it to the ATO, where the market value of the property is $750,000 or more. Unless they provide the buyer with a clearance certificate issued by the ATO.
However, from 1 January 2025, the withholding rate will rise from 12.5% to 15% of the purchase price. But perhaps the significant change is the removal of the current $750,000 threshold. Under the new rules, the withholding will apply to all relevant property transactions, regardless of the property’s value. This means that even lower-priced properties will now be subject to the withholding requirements, potentially affecting a much broader range of transactions.
Australian resident sellers can still avoid the withholding by obtaining a clearance certificate from the ATO before settlement. This certificate confirms that the vendor is not a foreign resident for tax purposes.
As we move closer to the implementation date in January 2025, it is vital to stay informed and prepare accordingly.
Who is a Foreign Resident for Tax Purposes?
Factors to consider when determining your residency status include the following:
- Visa status and your nationality;
- Duration and purpose of your stay in Australia; and
- Your family, employment and social ties to Australia.
What is a Clearance Certificate?
A Foreign Resident Withholding Clearance Certificate is a document given by the ATO that property owners must apply for to prevent or reduce the amount withheld from the sale of their property. This ensures the ATO collects tax on any capital gains from foreign residents.
The clearance certificate can be applied for on the ATO’s website or by clicking this link. You will need your tax file number for this application. Once you have submitted the application you should receive your clearance certificate within 28 days. If you haven’t filed a tax return in the last two years, the process can take the full 28 days as your application may be processed manually. If you are selling a home, we recommend this is done as soon as the Contract has been signed.
Certificates are valid for 12 months and can be used for multiple property sales. These certificates are only available to Australian residents, so if you are purchasing a property from foreign residents, you must withhold 12.5% tax from the purchase price
For more information about the upcoming changes and how they may affect your property transaction, or if you are selling or buying property and have questions, don’t hesitate to contact the team at Lynch Law.
