Updates to Foreign Resident Capital Gains Withholding (FRCGW)
On 1 January 2025, the Australian Taxation Office (ATO) have implemented significant changes to the Foreign Resident Capital Gains Withholding (FRCGW) rules, which will have a considerable impact on property sales across Australia. These changes are designed to ensure compliance with tax obligations and streamline the process for both buyers and sellers.
Previous Requirements:
Under the previous rules, if you’re an Australian resident selling property valued at $750,000 or more, you are required to provide a clearance certificate to the buyer before or at the time of settlement. This certificate serves as proof of your status as an Australian resident for tax purposes. Without it, the ATO deems you are a foreign resident, which triggers a withholding of 12.5% of the sale price to be remitted to the ATO at settlement. This withholding acts as a safeguard to ensure that any potential capital gains tax liabilities are covered.
What’s Changing:
For Contracts entered into on or after 1 January 2025, the ATO will eliminate the $750,000 property value threshold. This means that all Australian residents selling property, regardless of its value, must obtain a clearance certificate from the ATO. The withholding rate will also increase from 12.5% to 15%. If a clearance certificate is not provided, 15% of the sale price will be withheld by the buyer and remitted to the ATO. Any refund due to the seller will only be processed after the seller lodges their next income tax return. This change aims to simplify the process and ensure that all property transactions are treated consistently.
Example:
If you sell your property for $650,000 and you do not provide an ATO clearance certificate, $97,500 will be retained by the buyer and remitted to the ATO
Why These Changes Matter:
These changes are crucial for ensuring that tax liabilities are appropriately managed and that the ATO can efficiently collect taxes owed by foreign residents. For Australian residents, obtaining a clearance certificate is essential to avoid unnecessary withholding and potential delays in receiving funds from the sale.
Obtaining a Clearance Certificate:
The process of obtaining a clearance certificate is straightforward, but it requires some planning. Most certificates are issued within a few days, but some may take up to 28 days, depending on the complexity of the application. It’s advisable to apply early, as certificates are valid for 12 months. This means you can apply for a certificate even before you have signed a contract, providing peace of mind and ensuring a smooth transaction process.
Conclusion:
With these changes now in effect, it’s important for both buyers and sellers to be aware of the new requirements and plan accordingly. By understanding the need for a clearance certificate and applying in advance, sellers can avoid potential complications and ensure a seamless property sale experience. For more information, consult the ATO’s guidelines or speak with a legal professional to ensure compliance with the new rules.
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