When buying or selling Australian property, it is important to understand the Foreign Resident Capital Gains Withholding (FRCGW) regime and how it may affect settlement.
The FRCGW regime requires a purchaser to withhold part of the purchase price when buying certain Australian assets from a foreign resident vendor. The purchaser then pays this amount to the Australian Taxation Office (ATO).
The ATO applies the withheld amount as a credit against the vendor’s potential capital gains tax (CGT) liability.
Although the regime targets foreign residents, it can also affect Australian property transactions. Both buyers and sellers should understand their responsibilities before settlement.
The property lawyers at Somerville Laundry Lomax can assist with property transactions and help ensure all legal requirements are addressed during the conveyancing process.
What is Foreign Resident Capital Gains Withholding?
Foreign Resident Capital Gains Withholding is a tax collection measure that applies when a purchaser acquires certain Australian assets from a foreign resident vendor.
The purchaser may need to withhold part of the purchase price and pay it directly to the ATO. The vendor can then use this amount as a credit towards their Australian tax obligations.
The purpose of the regime is to help ensure foreign residents meet their Australian capital gains tax obligations when they sell taxable Australian property.
When does foreign resident capital gains withholding apply?
The FRCGW rules generally apply to transactions involving taxable Australian property, including:
- direct interests in Australian real property;
- certain company title interests; and
- certain indirect interests in Australian real property.
The rules apply to contracts entered into from 1 July 2017 where the property has a market value of $750,000 or more.
Where the rules apply, the purchaser must withhold 12.5% of the purchase price unless the vendor provides a valid clearance certificate or variation notice.
What are the obligations of the seller?
Australian resident vendors should apply for a clearance certificate before settlement. This confirms that the purchaser does not need to withhold funds under the FRCGW regime.
The vendor should provide the clearance certificate to the purchaser before settlement.
Applying early can help prevent delays. The ATO may need additional information before issuing the certificate, which can affect the settlement timeframe.
If the vendor does not provide a valid clearance certificate, the purchaser may need to withhold 12.5% of the purchase price. This can apply even when the seller is an Australian resident.
What are the obligations of the purchaser?
The purchaser must determine whether the withholding rules apply and pay any required amount to the ATO.
The purchaser does not need to investigate whether the vendor is a foreign resident. Instead, they rely on documents provided by the vendor, such as a clearance certificate or variation notice.
If the vendor does not provide the required documentation before settlement, the purchaser must withhold the applicable amount and pay it to the ATO.
What is a clearance certificate?
A clearance certificate is a document issued by the ATO that confirms the purchaser does not need to withhold an amount from the sale proceeds under the FRCGW regime.
Australian resident vendors can apply for a clearance certificate through the ATO before selling their property. Once issued, the vendor provides the certificate to the purchaser before settlement.
Obtaining the certificate early can help avoid settlement delays and allow the transaction to proceed smoothly.
When is foreign resident capital gains withholding not required?
The withholding obligation does not apply in some circumstances, including where:
- the taxable Australian property transaction has a market value below $750,000;
- the transaction occurs through an approved stock exchange;
- another withholding obligation already applies;
- the transaction involves a securities lending arrangement; or
- the foreign resident vendor is under external administration or bankruptcy.
Who pays the withholding amount to the ATO?
The purchaser is responsible for paying the withheld amount to the ATO.
The withholding amount does not create an additional cost for the purchaser. Instead, the purchaser deducts this amount from the purchase price paid to the vendor.
The vendor receives a credit for the withheld amount against their tax liability. If the withheld amount exceeds the vendor’s actual tax liability, the vendor may be able to claim a refund after lodging their tax return.
When must the withholding payment be made?
The purchaser must generally pay the withholding amount electronically to the ATO on settlement day.
If the vendor has not provided a clearance certificate or variation notice before completion, the purchaser must withhold the required amount and complete the necessary ATO payment notification process.
What happens if the FRCGW rules are not followed?
Penalties may apply if a party fails to comply with their obligations under the Foreign Resident Capital Gains Withholding regime or provides false or misleading information.
Failing to complete the required steps can also delay settlement and create financial issues for both buyers and sellers.
How can foreign resident capital gains withholding affect settlement?
The FRCGW regime creates an additional step in many property transactions. Buyers and sellers should consider these requirements early in the conveyancing process.
Sellers should apply for a clearance certificate before settlement to avoid unnecessary delays and ensure they receive the correct sale proceeds.
Purchasers should confirm they have received the required documentation before settlement to meet their withholding obligations.
Your property lawyer at Somerville Laundry Lomax can assist with reviewing the requirements, preparing for settlement and ensuring all necessary documents are completed correctly.
Conclusion
The Foreign Resident Capital Gains Withholding regime creates important responsibilities for both property buyers and sellers.
Understanding when withholding applies, applying for a clearance certificate early and completing the required documentation can help prevent settlement delays and unexpected issues.
If you need assistance with a property transaction, the experienced property lawyers at Somerville Laundry Lomax can provide advice to help your sale or purchase proceed smoothly.