From 1 January 2025, significant changes to Australia’s Foreign Resident Capital Gains Withholding (FRCGW) regime will take effect, impacting both Australian expats and foreign investors involved in property transactions. These updates introduce a higher withholding rate and the removal of the previous property price threshold, making it critical for affected individuals to understand their obligations.
If you own property in Australia but live overseas, or are considering selling Australian real estate, these new rules could directly impact you. Here’s everything you need to know.
See below what Australian Partner, Craig Holding, had to say.
Key changes to the FRCGW regime
The Foreign Resident Capital Gains Withholding scheme was initially introduced in July 2016 to ensure that foreign investors meet their Australian tax obligations when selling property. The latest amendments, enacted under Act No. 135, 2024 – Treasury Laws Amendment (2024 Tax and Other Measures No. 1), introduce two significant changes:
- Increased withholding rate: The withholding rate will rise from 12.5% to 15% of the contract price, affecting all relevant property transactions.
- Removal of the $750,000 threshold: Previously, properties sold below this value were exempt from the scheme. However, as of 1 January 2025, all property sales will be subject to withholding, regardless of sale price.
Additionally, option contracts will now fall under the updated withholding rules. If an option to purchase a property is exercised after 1 January 2025, the new withholding rate will apply—even if the original option agreement was signed before that date.
How these changes impact you for: Australian residents selling property
If you are an Australian tax resident selling a property, the removal of the $750,000 threshold means you must take proactive steps to avoid the 15% withholding tax being deducted at settlement.
- Obtain a clearance certificate: Australian residents can avoid the withholding by applying for a Clearance Certificate from the Australian Taxation Office (ATO) before settlement.
- Each seller must apply: In cases of joint ownership, each seller must separately apply for a Clearance Certificate.
- Plan ahead: Clearance Certificates are valid for 12 months, but with expected processing delays, it is advisable to apply well in advance of a property sale.
Failure to obtain a Clearance Certificate means the buyer is required to withhold 15% of the sale price—an amount you can later claim as a tax credit when filing your tax return.
For Non-Residents and Foreign Investors
If you are a non-resident for tax purposes, these changes mean that every sale of Australian property will now be subject to the 15% withholding rate, regardless of price.
- Higher withholding rate: Foreign sellers will now see 15% of the sale price automatically deducted at settlement.
- No sale price exemption: The removal of the $750,000 threshold means that even lower-value properties are now affected.
- Potential for reduced withholding: In some cases, non-resident sellers may apply for a reduced withholding rate. Seeking specialist tax advice is recommended to explore your options.
What is a Non-Resident for tax purposes?
Under Australian tax law, an individual is generally considered a non-resident if they do not meet any of the four statutory residency tests under subsection 6(1) of the Income Tax Assessment Act 1936. These include:
- The Ordinary Concepts test – Whether an individual “ordinarily resides” in Australia.
- The domicile test – Whether a person’s permanent home is in Australia.
- The 183-day test – If a person spends 183 days or more in Australia within a financial year, they are deemed a resident unless they have a usual place of abode overseas.
It is a misconception that staying in Australia for less than 183 days automatically makes someone a non-resident—meeting any one of the residency tests could result in tax residency status.
How the FRCGW scheme works
Under the revised FRCGW Scheme, when a non-resident sells or leases property in Australia:
- The buyer or lessee must withhold 15% of the sale price or lease premium.
- This amount is remitted directly to the ATO.
- Non-residents may need to apply for a reduced withholding rate or claim credits when lodging their Australian tax return.
If a contract or lease agreement was signed before 1 January 2025, the previous rules (12.5% withholding for properties over $750,000) still apply.
Do these changes affect Australian residents?
Yes—although the FRCGW Scheme primarily targets non-residents, Australian residents selling property must take action to avoid being caught in the withholding net.
- Obtain a Clearance Certificate: Without a valid ATO Clearance Certificate, buyers are legally obligated to withhold 15% of the sale price—even if the seller is an Australian resident.
- Timing matters: Clearance Certificates must be submitted to the buyer before settlement; otherwise, the withholding applies.
- Fast-track urgent applications: In urgent cases, professional assistance may help speed up the Clearance Certificate application process.
Next steps: What should Australian Expats and foreign investors do?
If you are an Australian expat, a foreign investor, or a non-resident considering a property transaction in Australia, it is essential to act now to avoid unexpected tax burdens.
- Understand your residency status – Ensure you meet the correct tax residency criteria before engaging in property transactions.
- Apply for a clearance certificate early – Avoid unnecessary delays and withholding by securing your ATO Clearance Certificate well in advance.
- Seek professional tax advice – Consulting with an Australian tax specialist can help reduce withholding tax obligations and navigate the new rules effectively.
Potential challenges and considerations
While these changes aim to enhance tax compliance, they also introduce potential challenges for both foreign investors and Australian residents. The removal of the price threshold may deter some overseas buyers, while the increased withholding rate could impact cash flow for sellers. Additionally, delays in obtaining ATO Clearance Certificates may complicate transactions for Australian residents. Given the complexity of tax residency rules and the risk of misclassification, seeking professional tax advice is essential to avoid unexpected financial burdens and ensure compliance with the new regulations.
Conclusion: Prepare for the FRCGW changes in 2025
These FRCGW updates are designed to increase compliance among non-residents, but they also introduce new challenges for Australian residents. Understanding the higher withholding rates, removal of sale price exemptions, and new compliance requirements is critical to ensuring a smooth property sale process.
Whether you’re an Australian expat selling an investment property or a foreign investor planning an exit, preparing in advance can help you avoid unnecessary tax complications and unexpected financial setbacks.
For tailored guidance on navigating these changes, consider seeking professional financial and tax advice to ensure you remain compliant under the new FRCGW rules.
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Disclaimer
This article is for informational purposes only and does not constitute financial, tax, or legal advice. The information is based on legislation as of February 2025 and may be subject to future amendments. Before making any financial or investment decisions, GSB recommends consulting with a qualified financial adviser or tax specialist to ensure compliance with Australian tax laws. GSB does not accept responsibility for any losses or liabilities incurred as a result of reliance on the information provided in this article.
GSB Capital Ltd is registered with the Dubai International Financial Centre (DIFC), Licence No. CL4377, and is regulated by the Dubai Financial Services Authority (DFSA). The financial products and services referred to in this article may not be suitable for all investors and are intended for Professional Clients and Market Counterparties as defined by the DFSA. Retail clients may not be eligible for certain protections under DFSA rules. Please seek independent financial advice before making any investment decisions.