What is Foreign Resident Capital Gains Withholding Tax?
If you sell real estate located in Australia and are a foreign resident for Australian tax purposes (non-resident), the purchaser will generally withhold 15% of the purchase price and send it to the Australian Taxation Office (ATO). This is ‘Foreign Resident Capital Gains Withholding’ (FRCGW).
Understanding the foreign resident capital gains tax
This may shock Australian expats who are non-resident sellers leaving some unable to discharge their mortgage on sale. It also may cause other issues on settlement and tie up funds that were needed elsewhere.
Prior to 1 January 2025, the rate was 12.5% and applied only to properties sold for more than $750,000, however, any new sales on or after 1 January 2025, regardless of sales price, will have FRCGW applied.
For a property selling for $1M, the FRCGW would be $150,000, and a property selling for $300,000 would have $45,000 FRCGW withheld.
The tax is set aside for the seller and is used to reduce any Australian tax payable when the seller completes their Australian tax return. In some cases, additional tax may be payable, and in others, a refund may be due.
This will depend on the ultimate capital gain and any concessions that may apply such as the main residence exemption or capital gains tax (CGT) discount.
Timing of Tax Returns
A taxpayer would usually need to wait tax until the end of the tax year (30 June) to lodge their Australian tax return, so for a property sale early in the tax year (eg July), individuals may need to wait over a year to lodge their tax return and reclaim any over withheld amount.
Options for Sellers
There are some options for Australian expat sellers, however your tax affairs need to be in order as all paperwork needs to be finalised prior to settlement of the property.
If you have in fact just returned from overseas and are an Australian tax resident at the time of sale, you can complete a ‘clearance certificate’ to waive the FRCGW requirement.
If you are not an Australian tax resident, you may apply for a variation of the withholding amount down to the amount of actual tax due on the sale.
Variation Calculation Example
Example variation calculation:
Sales price $800,000
Less: Cost base ($720,000)
Gross capital gain (assumes no main resident exemption or CGT discount) $80,000
Tax on sale (assuming 30%) $24,000
FRCGW if no variation (15% x $800,000) $120,000
In the above example, a variation can be completed to reduce the withholding to $24,000 instead of $120,000.
Preparing the Variation Calculation
Preparing the variation calculation can require a reasonable amount of work. The cost base of the property needs to be calculated, including:
- Costs incurred in buying or selling the property
- Ongoing holding costs whilst not renting
- Any capital works deducted over the ownership period
If the property has been owned for some time, there may be difficulties in finding the relevant documents.
Where the property was the individual’s main residence or had periods of Australian tax residency over the ownership period, a reduction to the CGT amount may be available due to the main residence exemption (limited circumstances) or CGT discount.
The ATO will also consider other reasons that the tax due may be below 15% such as carried forward accumulated capital or revenue losses.
Expert Assistance on Foreign Resident Capital Gains
Our specialist team can assist to demystify your tax outcome when selling your property, including:
- Assessing your Australian tax residency
- Calculating capital gain
- Preparing a clearance certificate or FRCGW variation
- Preparing and lodging outstanding tax returns
- Liaising with the ATO on your behalf
Please contact us to discuss your position.
To learn more, check out Atlas Wealth Groups’ podcast: Expat Chat