As we welcome 2025, it’s important for property owners, investors, and real estate professionals to understand an important regulatory change in the Australian property market. The Foreign Resident Capital Gains Withholding (FRCGW) policy has been updated, effective from January 1, 2025. This change is crucial for both local and foreign property investors, as it could significantly impact your sale strategy if you are a foreign property owner.
Let’s take a closer look at what these changes mean and how they could affect you.
What is the Foreign Resident Capital Gains Withholding (FRCGW)?
The Foreign Resident Capital Gains Withholding was initially introduced on July 1, 2016, to ensure that foreign sellers comply with their tax obligations when disposing of real estate in Australia. Under the original framework, buyers purchasing properties from foreign residents were required to withhold a percentage of the sale price and remit it to the Australian Tax Office (ATO). This was intended to ensure that foreign sellers paid the correct capital gains tax on the profit made from selling their property.
Until December 31, 2024, the withholding tax rate was set at 12.5%, and it only applied to properties valued above $750,000 AUD. However, starting January 1, 2025, the tax rate will rise to 15%, and the $750,000 threshold will no longer apply. This means that now, any property sold by a foreign resident will be subject to the withholding tax, regardless of the sale price.
What Does This Policy Change Mean for You?
The new regulation will have a significant impact on foreign property owners, especially those who are planning to sell in 2025 or beyond.
Consider the following scenarios:
Example 1 – 2024: A foreign seller lists a $1 million AUD home in 2024. Without applying for a Tax Clearance Certificate (TCC), the ATO will withhold 12.5% of the sale price, amounting to $125,000. However, by applying for the TCC ahead of the settlement, the seller can receive a refund of the $125,000 once their tax liabilities are settled.
Example 2 – 2025: If the same property owner decides to sell in 2025, the situation changes significantly. With the removal of the $750,000 threshold and the increase in the withholding tax rate to 15%, the withholding amount for the same $1 million property would be $150,000. This represents a notable increase compared to previous years.
This increase could create financial strain for some sellers, especially if they have not factored in this higher withholding tax. Planning ahead is essential to avoid any surprises and to ensure a smooth transaction.
How Can You Avoid the Withholding Tax – Apply for a Tax Clearance Certificate
There is a way to avoid the withholding tax: foreign sellers can apply for a Tax Clearance Certificate (TCC) from the ATO before selling their property. If you meet the necessary criteria, the ATO will typically process your request within a few days, with a maximum wait time of 28 days. However, for those who have not previously filed taxes in Australia, the process may take longer and could extend to several months.
We highly recommend that foreign property owners begin this process well in advance of their intended sale to ensure everything is in order and to prevent any delays during the settlement.
Conclusion
The changes to the Foreign Resident Capital Gains Withholding rules are significant, especially with the removal of the $750,000 threshold and the increase in the withholding tax rate. These updates will affect foreign property owners looking to sell, and it’s essential to understand the new requirements and take steps to minimize the impact of the withholding tax.
For further details on how this policy may affect your sale or for guidance on how to apply for a Tax Clearance Certificate, feel free to contact Elite Real Estate. We’re here to help you navigate the Australian property market with ease.
Stay tuned for our next blog post, where we’ll explore the potential impact of interest rate changes on property values.
Written by Josephine Andrea of Elite Real Estate.
