The Government has passed changes to the Foreign Resident Capital Gains Tax withholding regime with affect from 1 January 2025 requiring purchasers of Australian real estate to withhold 15% from the purchase price of all property unless the seller produces a Clearance Certificate issued by the Australian Taxation Office (ATO). Previously the withholding rules only applied to properties sold for $750,000 or more and at a rate of 12.5%.
The purchaser must remit the withholding to the ATO by the settlement date. A purchaser that fails to withhold may be subject to a penalty equal to 10 penalty units (currently being $3,300) or the amount that was required to be withheld. General interest charge may be imposed on amounts withheld but not paid by the due date.
The amount withheld will be used as a refundable credit against any tax payable by the seller when it lodges its tax return for the year of disposal. The rules aim to ensure that Australian tax is collected on the disposal of property by a foreign owner but the scope of the provisions is much wider and will apply to Australian resident sellers unless they obtain a clearance certificate.
Australian resident sellers can apply to the ATO for a clearance certificate, or have their tax agent apply for them. The ATO advises most certificates are issued within a few days but it can take up to 28 days to process and issue. As certificates are valid for 12 months from the date of issue we would recommend sellers apply for a certificate ahead of any proposed sale.
While the application for a certificate (or variation of withholding rate) is relatively simple provided a taxpayer has all necessary information, it can be problematic for properties with multiple owners, or taxpayers that may not have lodged a tax return in years and have lost their tax file number, or for deceased estates. Each registered owner needs to apply for a certificate.
Foreign residents cannot obtain a clearance certificate, but may apply for a variation (including to 0%) where they can prove that the 15% withholding rate is excessive for reasons including:
Be aware that the Foreign Resident Capital Gains Tax can also apply to a sale of indirect Australia real property interests, such as sale of shares in companies or interests I trusts which own real property. Purchasers of companies and trusts with property should ensure they do appropriate due diligence and require a vendor declaration in relation to Australian tax residency to ensure that no withholding is required.
For further information please refer to the ATO website Foreign resident capital gains withholding | Australian Taxation Office, contact your usual Exant advisor or our Tax Specialist, Jamie Towers on 07 3218 3900.