Key points
- From 1 January 2025, withholding tax levied at the rate of 15% is payable on all real estate sales in Australia.
- To avoid liability, vendors / sellers of real estate need to provide a clearance certificate or a variation certificate to purchasers / buyers under s14-215 of Schedule 1 to the Taxation Administration Act 1953 (Cth).
- The clearance certificate is officially called the Foreign Resident Capital Gains Withholding certificate (‘FRCGW’). The clearance certificate certifies that “Purchasers are not required to withhold and pay an amount.”
- If the vendor / seller is an Australian resident for tax purposes, the vendor / seller makes an online application to the Australian Taxation Office (ATO) for the FRCGW to establish their tax residency status as Australian. The clearance certificate will usually issue within 24 hours and is valid for 12 months.
- If the vendor / seller is a foreign resident for tax purposes, they may make an application to the ATO for a variation to reduce the tax rate of 15%.
- The ATO may grant a variation to foreign residents for reasons such as the capital gains tax payable on the sale is less than 15% of the price or a double tax treaty applies between Australia and the foreign country of tax residence. The variation takes 28 days to process.
- The sale of a main residence by a foreign resident will not qualify for a variation unless the sale is a result of a life event (death, divorce, illness).
- If FRCGW is paid, it is available as a tax credit.
The evolution of the FRCGW regime for real estate
According to the Budget Mid-Year Economic and Fiscal Outlook statement 2023-24:
“The foreign resident capital gains withholding regime is an integrity measure that first came into effect on 1 July 2016.
It imposes an obligation on the purchaser of certain Australian real property (and related interests) to withhold a percentage of the purchase price and remit that to the Australian Taxation Office, where the property is acquired from a foreign resident vendor.”
When the FRCGW was introduced, the withholding tax rate was 10% and applied only to residential transactions where the value was $2 million or more.
On 1 July 2017 the rate was increased to 12.5% and the threshold value for transactions was reduced to $750,000. The reason given was “improving housing affordability”.
The Australian Government has now tightened the net further to “increase the integrity” of the regime because “where CGT liabilities are greater than 12.5%, there remains an incentive for foreign residents to avoid lodging a tax return to sidestep their tax obligations”. [source: Minister’s second reading speech 12 September 2024]
According to the Budget Mid-Year Economic and Fiscal Outlook statement 2023-24:
“The Government will increase the foreign resident capital gains withholding tax rate from 12.5 per cent to 15 per cent and reduce the withholding threshold from $750,000 to $0. The changes will apply to real property disposals with contracts entered into from 1 January 2025.
The measure will complement the Government’s initiatives to improve housing affordability for Australians. It will ensure better compliance by foreign residents with their Australian tax obligations and support the collection of tax liabilities from foreign residents.
This measure is estimated to increase receipts by $150 million and increase payments by $5.9 million over the five years from 2022–23.”
What real estate assets require a clearance certificate?
According to the ATO overview of 20 December 2024 –
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.
Qualification for Australian Residence
According to the ATO overview of 20 December 2024 –
Individuals
The residency test for individuals for tax purposes is different to that for social security and immigration purposes.
Generally, an individual will be an Australian resident for tax purposes if they:
- have always lived in Australia, or came to Australia and live here permanently
- have been in Australia continuously for 6 months or more, and for most of that time, worked in one job and lived at the same place
- have been in Australia for more than 6 months of the year, unless their usual home is overseas and they don't intend to live in Australia
- go overseas temporarily and don't set up a permanent home in another country
- are an overseas student who came to Australia to study and are enrolled in a course that is more than 6 months.
You can work out your tax residency or work out your residency status for tax purposes.
Non-individuals
Different residency tests apply to non-individual entities such as companies, corporate limited partnerships and trusts.
Non-individuals can refer to Working out your residency.
Conveyancing practice
The standard form Contracts for Sale of real estate contain clauses/conditions/terms applicable to the FRCGW.
In NSW, the Contract for the sale and purchase of land provides that purchaser may deduct the FRCGW remittance from the price payable on completion (clause 16.5.1). Completion of the contract can be delayed while the ATO processes the application, provided time limits have been observed (clause 31).
In Victoria, the Contract of Sale of Land provides that every vendor is treated as a foreign resident unless they provide a clearance certificate, and the FRCGW is to be deducted from the price at either the full rate or as varied (clause 24).
In Queensland, the Contract for Houses and Residential Land provides that the buyer is authorised to pay the FRCGW to the ATO if the sale is not an excluded transaction and the seller has not given the buyer a clearance certificate or variation on or before settlement. The buyer must lodge the FRCGW Purchaser Notification Form with the ATO on or before settlement (clause 2.5(3)).
In Western Australia, the Joint Form of Conditions for the Sale of Land provide that the buyer must deduct the FRCGW from the price payable at settlement and pay it to the ATO if the seller does not provide a FRCGW certificate (or variation) (clause 3.7).