If you are selling property in Australia and are a foreign resident, or even an Australian resident disposing of certain types of property, you may be required to obtain a Foreign Resident Capital Gains Withholding (FRCGW) tax certificate. This legal requirement, established by the Australian Tax Office (ATO), ensures that a portion of the sale proceeds are withheld and remitted to the ATO, unless an exemption applies.

The FRCGW withholding was introduced to address potential non-payment of capital gains tax (CGT) by foreign residents selling Australian properties. The scheme imposes an obligation on the buyer to withhold 12.5% of the purchase price for certain property transactions exceeding $750,000 unless a clearance certificate or a variation certificate is provided by the seller.The withheld amount is forwarded to the ATO, protecting Australia’s tax revenue and ensuring compliance with CGT obligations.

Note carefully: from 1 January 2025, the threshold referred to in this blog will be reduced to $1 and the withholding percentage will be increased to 15%.

Who Needs to Obtain the Certificate?

If you are an Australian resident selling property above the $750,000 threshold, you need to obtain a clearance certificate from the ATO. This certificate confirms to the buyer that no withholding tax is required on the transaction. The buyer must then provide a copy of the certificate at settlement. Failure to do so may result in the buyer withholding 12.5% of the purchase price, which can have significant financial implications for the seller.

For foreign residents, a variation certificate may be obtained to reduce the withholding rate if the seller believes that the standard 12.5% withholding is too high, particularly if the actual capital gains tax liability will be less than that.

When Should You Apply?

It is advisable to apply for the certificate well before the sale date, as the ATO typically takes several weeks to process applications.This ensures that there is no delay in finalising the transaction. Once obtained, the certificate is valid for a 12-month period and can be used for multiple sales during that time.

Consequences of Non-Compliance

Without a valid certificate, the buyer is legally obliged to withhold 12.5% of the sale proceeds and remit this amount to the ATO. This can significantly reduce the funds available to the seller at settlement, particularly if the seller is an Australian resident not subject to the FRCGW. Sellers are strongly encouraged to obtain the required certificate in time to avoid unnecessary complications.

Conclusion

Whether you are an Australian resident or a foreign investor, complying with the Foreign Resident Capital Gains Withholding tax scheme is essential for a smooth property transaction. Dott & Crossitt Solicitors can assist you with the process of obtaining the appropriate certificate and ensure your obligations under the FRCGW are fully met, allowing you to focus on your property sale with confidence.

If you have any questions or require assistance with obtaining a Foreign Resident Capital Gains Withholding Tax Certificate, contact us at Dott & Crossitt Solicitors today.

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