New ATO Withholding Rules for Property Sales

Effective from 1 January 2025, significant changes are being introduced to the Foreign Resident Capital Gains Withholding (FRCGW) rules in Australia, affecting both Australian residents and foreign residents buying and selling property. If you’re involved in property transactions, it’s important to understand how these changes may impact you.

What are the FRCGW Rules?

The FRCGW rules were originally designed to ensure the Australian Taxation Office (ATO) collects tax liabilities from foreign residents who sell Australian property. The mechanism required the purchaser to withhold a percentage of the sale price and remit it to the ATO.

Until now, these rules only applied to property sales where the sale price exceeded $750,000, and Australian residents were able to avoid withholding by providing a clearance certificate from the ATO.

However, as of 1 January 2025 the rules are changing with new withholding requirements for both Australian residents and foreign residents. Here’s a breakdown of the key updates.

Increased Withholding Rate:

The withholding rate will rise from 12.5% to 15% for all property sales including those involving Australian residents.

Removed $750,000 Threshold:

The $750,000 property value threshold will be removed meaning withholding will apply to all property sales regardless of the price.

Clearance Certificates for Australian Residents:

Australian residents must now provide a clearance certificate from the ATO before settlement to avoid the withholding. If they don’t, 15% will be withheld.

Delays in Refunds:

If withholding applies, the vendor will only receive a refund after their income tax return is processed, which could take several months.

Application Timelines:

Clearance certificates can take up to 28 days to process, vendors should apply early. The certificates are valid for 12 months so vendors don’t need to wait until signing a contract.

Foreign Resident Vendors:

Foreign residents may apply for a variation to the withholding rate but must meet additional ATO requirements.

What This Means for You:

Australian residents selling property must apply for a clearance certificate to avoid the withholding.
Foreign residents may still need to apply for a variation of the withholding rate.
Purchasers will need to withhold 15% of the sale price unless the seller provides a clearance certificate.

These changes apply to contracts entered on or after 1 January 2025 so it’s essential to plan ahead.