FOREIGN RESIDENT CAPITAL GAINS WITHHOLDING (FRCGW)?

WHAT IS FRCGW AND WHO DOES IT EFFECT?

In 2016 a foreign resident capital gains withholding (FRCGW) was introduced and applied to real estate transactions over $2 million. A 10% capital gains withholding tax was required to be withheld by the purchaser, regardless of the vendor’s residency status, unless a qualifying clearance certificate was produced prior to settlement proving that they were not a foreign resident. This affected very few transactions and rarely needed to be dealt with.

FRCGW CHANGES IN 2017            

As of 1 July 2017, this changed, and the government introduced new criteria in the Federal Budget. Now all vendors selling property over $750,000 will now have to provide proof they are not a foreign resident. The FRCGW tax rate has also increased to 12.5%. This is achieved by applying for the clearance certificate online from the Australian Taxation Office (ATO) and must be initiated early enough so that settlement can take place on time.

NEW FRCGW CHANGES EFFECTIVE FROM JANUARY 2025

Legislation enacting changes to foreign resident capital gains withholding (FRCGW) has now passed and will apply to contracts entered into on and after 1 January 2025.

Under the latest changes the withholding rate will increase from 12.5% to 15% and the $750,000 property value threshold will be removed and the withholding rules will apply to ALL property sales.

FRCGW is designed to support the collection of tax liabilities owed by non-residents selling Australian properties.  All Australian residents selling property will require a clearance certificate from the ATO, or withholding will apply to the transaction. If an Australian resident vendor does not provide a clearance certificate by settlement, 15% of the sale price will need to be withheld by the purchaser and paid to the ATO.  If an amount is withheld from the sale price, the vendor will only receive any refund due after their income tax return is processed at tax time.  Most clearance certificates will issue within a few days, but it’s important to apply early because some can take up to 28 days to issue. They are valid for 12 months so the vendor doesn’t need to wait until they have signed a contract.  Foreign resident vendors may be able to apply to vary the withholding rate.

FRCGW COMPLIANCE LAWS                   

This change now affects all vendors so these vendors and their conveyancers will need to ensure that they have complied with these rules and make sure that the clearance certificates are requested early in the sale and/or settlement process.

There has been some past confusion in the industry as to who is actually required to apply for these clearance certificates. On the surface, it sounds like only foreign residents need to supply this information, however, this is not the case. Regardless of whether you are an Australian citizen or a foreign resident, ALL vendors must apply for the clearance certificate.

 HOW WILL THIS AFFECT YOU?

It is the vendor’s responsibility to obtain the clearance certificate and provide it to the purchaser at or before settlement. To avoid unanticipated delays, and to ensure the certificate is valid at the time it is given to the purchaser, vendors seeking a clearance certificate should apply through the online form as early as practical in the sale process which preferably on or before signing a contract. The time for the vendors to obtain their qualifying clearance certificate can be quite quick however the ATO  states they could take up to 28 days to produce. With the extra demand that these new rules will place on the system, this is something that should be initiated very early in the transaction.  In South Australia, many contracts are signed with a 30 to 45 day settlement in mind.

Without being presented with a valid clearance certificate, the purchaser will be required to remit 15% of the purchase price to us if no other exclusions apply.

As an industry it is so important that vendors, purchasers, real estate agents, financiers and conveyancers work together to ensure that the contract has a settlement date that is realistic, so that the transaction can be settled on time. It is also more important than ever that any potential buyer and seller see a conveyancer before they sign a contract.

WHAT DO YOU NEED TO DO?

As soon as you have a contract in place and even beforehand you can apply for the clearance certificate online. The certificate is valid for up to 12 months so can be used for any sale during that period.

The link to apply for the certificate is as follows:              https://www.ato.gov.au/FRWT_Certificate.aspx

Bear in mind that you need to apply for the certificate in the correct name and address that was recorded on your last tax return.  The vendor can be a person, a company, an executor of an estate and other entities so ask the question of what you need to do if you are unsure.

It is also best to have your tax file number as the applications get processed quicker if this is provided and getting the certificate sent to an email address is also the best and quickest way to receive it. You can then provide this certificate to your conveyancer in readiness for settlement.

Remember if you are in any way unsure of the process your conveyancer can assist.

As an industry it is so important that Vendors, Purchasers, Real Estate Agents and Conveyancers work together to ensure that the contract has a settlement date that is realistic so that the transaction can be settled on time. It is also more important than ever that any potential buyer and seller see a conveyancer BEFORE they sign a contract.

The team at McKay Business Services are all members of the AICSA and are proud Adelaide conveyancers