Proposed changes to the foreign resident capital gains withholding (FRCGW) rate
On 9 May 2017, the Government announced proposed changes to the foreign resident capital gains withholding (FRCGW) rate and threshold. The changes will apply to contracts entered into on or after 1 July 2017:
- for real property disposals where the contract price is $750,000 and above (currently $2 million)
- the FRCGW withholding tax rate will be 12.5% (currently 10%)
The existing threshold and rate will apply for any contracts that are entered into before 1 July 2017, even if they are not due to settle until after 1 July 2017.
Australian resident vendors selling real property will need to obtain a clearance certificate from the ATO prior to settlement, to ensure they don’t incur the 12.5% non-final withholding.
This withholding legislation assists the collection of foreign residents’ Australian tax liabilities. It imposes an obligation on purchasers to withhold 12.5% of the purchase price and pay it to the ATO, where a vendor enters into a contract on or after 1 July 2017 and disposes of certain asset types (or receives a lease premium for the grant of a lease over Australian real property).
The foreign resident vendor must lodge a tax return at the end of the financial year, declaring their Australian assessable income, including any capital gain from the disposal of the asset. A tax file number (TFN) is required to lodge a tax return; they will need to apply for a TFN if they don’t have one. The vendor may claim a credit for any withholding amount paid to us in their tax return.
- Australian resident vendors can avoid the 12.5% withholding by providing one of the following to the purchaser prior to settlement
- for Australian real property, a clearance certificate obtained from the ATO – Clearance certificate application for Australian residents
- for other asset types, a vendor declaration they are not a foreign resident.
- Foreign resident vendors may apply for a variation of the withholding rate or make a declaration that a membership interest is not an indirect Australian real property interest and therefore not subject to withholding.
- Purchasers must pay the amount withheld at settlement to the Commissioner of Taxation.
Note: the legislation specifies that the withholding is actually on the “first element of the cost base”. However, as purchase price is understood by vendors and purchasers, and in many instances will equate with the “first element of the cost base”, we have used the term purchase price for simplicity.
Legislation and supporting material
The Treasury Laws Amendment (Foreign Resident Capital Gains Withholding Payments) Bill 2017 was introduced to Parliament on 1 June 2017.
For transactions prior to 1 July 2017 the threshold and rate as stated in Tax and Superannuation Laws Amendment (2015 Measures No. 6) Act 2016 will apply.
Information on the application of the FRCGW is available on the ATO website and via the following links:
- Capital gains withholding: Impacts on foreign and Australian residents
- Fact sheet for real estate agents
- 2017–18 Budget Paper No.2 – Revenue Measures page 27
- 2017–18 Budget Fact Sheet 1.6 – Stronger rules for foreign investors owning Australian housing