Are you a foreign resident for Australian tax purposes (non-resident) who is selling Australian real estate?
Are you aware of the proposed changes to the Foreign Resident Capital Gains Withholding (FRCGW) tax?
The Government has commenced consultation on the proposed changes to Foreign Resident Capital Gains withholding (FRCGW) tax.
As part of the 2023-24 Mid-Year Economic and Fiscal Outlook, the Government announced that it will:
- Increase the FRCGW rate to 15%, from 12.5% and
- Remove the threshold before which withholding applies.
The threshold being removed exempted transactions below A$750,000, involving either taxable Australian real property or an indirect Australian real property interest.
The FRCGW regime, as set out in Subdivision 14-D in Schedule 1 to the TAA 1953, imposes a non-final withholding obligation on the purchaser of certain Australian real property and related interests where the property is acquired from a foreign resident vendor.
Foreign residents will be required to notify the Australian Taxation Office (ATO) prior to the transaction occurring when they dispose relevant CGT assets, so the tax is appropriately paid in Australia. This measure is in line with the OECD standards and international best practice, which gives Australia right to tax gains on assets that have a close economic connection to Australian land or natural resources.
Foreign resident capital gains withholding – current law
Under the current law, if a FRCGW obligation arises, the purchaser is required to withhold from the seller/vendor 12.5% of the purchase price of the asset that they acquired and pay that amount to the Commissioner.
The seller is entitled to a credit for amounts withheld upon the lodgement of an income tax return. The credit can be applied to any income tax liability that arises at the time when an income tax assessment is issued. Excess credits are refundable to the seller by the Commissioner.
A FRCGW obligation does not arise in relation to a CGT asset if, the market value of the CGT asset is less than A$750,000 and the CGT asset is taxable Australian real property or an indirect taxable Australian real property interest, the holding of which causes a company title interest to arise.
The withholding rate was last increased to the current 12.5%, from 10%, and the withholding threshold was reduced to the current A$750,000, from $2 million, from 1 July 2017. The FRCGW regime first came into effect on 1 July 2016.
Commencement of the proposed amendments
The proposed amendments to a FRCGW would apply to acquisitions made on or after the later of the start of 1 January 2025 and the commencement of this measure.
A purchaser is generally taken to have acquired an asset on the date they entered into the contract to acquire it (see Division 109 of the ITAA 1997). Therefore, these amendments will not apply to transfers that occur under a contract entered into prior to the later of the start of 1 January 2025 and the commencement of this measure.
Andersen Commentary
- The proposed amendments are expected to increase compliance by foreign residents.
- Increasing the withholding rate is anticipated to better support the collection of Australian income tax liability and incentivise foreign residents to lodge their Australian tax return so their final tax liabilities can be accurately assessed and collected.
- By removing the threshold before which FRCGW applies, the Government is aiming to strengthen the integrity of the FRCGW regime and provides for a more equitable treatment of disposals of Australian real property interests by foreign residents.
Are you looking for assistance to:
- Review your Australian tax residency position
- Calculate the Capital Gain Tax
- Prepare a Clearance Certificate if you are an Australian tax resident at the time of sale;
- Determine if you may apply for FRCGW variation (to vary FRCG withholding amount to the amount of actual tax due on the sale)
- Prepare the CGT Variation calculation
- Assist with lodgement of your outstanding Australian returns
