Changes to the Foreign Resident Capital Gains Tax Withholding Regime

Australian expats have been alerted since the Federal Budget that the Australian Government intends to expand capital gains tax liabilities. On July 23, the Treasury released draft legislation to amend the Foreign Resident Capital Gains Tax Withholding (FRCGW) regime. This change will affect Australian expats selling property located in Australia. This proposed change could have significant implications for those managing their investments from abroad.

Proposed Changes to the Foreign Resident Capital Gains Tax Withholding Regime

The exposure draft outlines important changes to the application of Australia’s capital gains tax withholding regime for foreign residents. Key changes include:

• Increasing the withholding rate: The current rate of 12.5% will rise to 15%. This increase may result in a more substantial upfront tax payment when selling property. This will impact the net proceeds received by the seller.
• Removing the A$750,000 threshold: Previously, the FRCGW regime applied only to property sales above this threshold. With its removal, all property sales will be subject to the withholding tax, regardless of the sale price. This change aims to streamline the taxation process for foreign residents and increase compliance.

If enacted, these amendments will take effect on the later of January 1, 2025, or the commencement of the relevant legislation. Australian expats should prepare for this change, as it could affect financial planning and cash flow during property transactions.

Impact on Australian Expats

The proposed changes to the FRCGW regime, mean that the Australian Taxation Office (ATO) will collect a greater withholding tax amount upfront, when a foreign resident sells a property. This adjustment could lead to a significant reduction in the initial sale proceeds received at the time of the transaction.

For many expats, this change could be a double-edged sword. While the ATO collects taxes upfront, it shifts the burden onto the seller. They must either dispute the capital gains tax treatment or lodge an income tax return. This may create additional stress and financial uncertainty, particularly for those who are already managing investments from overseas.

Furthermore, Treasury has indicated that these amendments aim to align Australia’s capital gains tax regime more closely with international tax practices. By doing so, the government seeks to enhance the integrity of the tax system and ensure that it aligns with the rights provided under Australia’s extensive tax treaty network. This move may also make Australia a more attractive destination for foreign investors, albeit at the cost of additional burden on current expatriates.

How Australian Expats Can Prepare

While this proposed change is not yet law, Australian expats should remain vigilant and informed about these developments. It is crucial to understand that these changes may significantly reduce cash flow at the time of property sale. This reduction will impact overall financial planning.

Here are some steps that expats can take to prepare:

1. Stay Informed: Monitor updates from the Australian Treasury and consult financial advisors to understand how these changes may affect your specific circumstances.
2. Plan for Cash Flow: Adjust your financial strategies to account for the increased withholding tax rate and the removal of the threshold. This may involve reevaluating your investment portfolio or discussing strategies with a financial planner.
3. Consult a Tax Professional: Engaging a tax advisor familiar with Australian tax laws and international tax implications can help navigate the complexities of the proposed changes. They can assist with understanding potential liabilities and help strategise around the impending changes.
4. Consider Long-Term Investments: If you are considering selling property in Australia, evaluate the long-term investment benefits against the immediate cash flow impacts of the new regime.

As the consultation on the draft legislation has already closed (on August 5), we anticipate a formal update from Treasury in the coming months. For more insights on navigating the complexities of capital gains tax as an Australian expat, contact us. Staying informed and prepared is essential for managing your financial future effectively!

To learn more, check out Atlas Wealth Groups’ podcast: Expat Chat