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Foreign Resident Capital Gains Withholding (FRCGW) – 2025 Update

If you’re planning to sell property in Australia, understanding Foreign Resident Capital Gains Withholding (FRCGW) is essential. Designed to ensure tax compliance, FRCGW applies not only to foreign residents but also to Australian residents who dispose of a property and do not obtain a tax clearance certificate. While a settlement agent will handle these requirements as part of their service, it’s helpful to have a clear understanding of the rules. Let’s explore what FRCGW is, when it applies, and how it is implemented, so you can approach property transactions with confidence.

What is Foreign Resident Capital Gains Withholding (FRCGW)?

FRCGW is a withholding mechanism aimed at ensuring foreign residents meet their capital gains tax (CGT) obligations when selling Australian property. When selling or disposing of residential property, commercial property and vacant land, purchasers are required to withhold a portion of the sale price and remit it to the Australian Taxation Office (ATO) unless the vendor provides a clearance certificate or variation notice. For Australian residents, this step ensures that CGT obligations are addressed; for foreign residents, it helps secure compliance with Australian tax laws.

FRCGW is not a final tax. Any differences between the amount withheld and the actual tax liability are resolved when the vendor lodges their tax return. For both foreign and Australian residents, understanding these requirements is vital to avoid unnecessary delays or unexpected financial impacts.

When Does FRCGW Apply?

FRCGW applies to the sale or disposal of certain taxable Australian real property and related assets. Vendors must meet specific criteria to determine if withholding applies. Commonly impacted properties include:

• Residential and commercial real estate.
• Vacant land and mining rights.
• Indirect Australian real property interests (e.g., shares in a company that is “land rich”).

Key FRCGW Rates

• Old Rule: Contracts signed on or before 31 December 2024: 12.5% withholding applies to residential property only, valued at $750,000 or more.
• New Rule: Contracts signed on or after 1 January 2025: 15% withholding applies to all properties, regardless of value.

Example of the new (post-1 January 2025) rule: Emma, a foreign resident, sells a property for $1.5 million in December 2024. The buyer, Michael, must withhold 12.5% ($187,500) and pay it to the ATO. If the contract had been signed in January 2025, the withholding would increase to 15% ($225,000).

Clearance Certificates for Australian Residents

Australian residents must provide a valid clearance certificate to avoid FRCGW withholding. This certificate confirms their residency status for tax purposes.

How to Obtain a Clearance Certificate

• Apply to the ATO as early as possible—applications are free and typically processed within a few days, though some may take up to 28 days.
• Each vendor listed on the property title must apply individually.

Example: James and Sarah, both Australian residents, decide to sell their $800,000 home. Sarah applies for her clearance certificate promptly, but James delays. At settlement, the buyer is required to withhold 15% ($60,000) from James’ share of the proceeds, delaying his access to funds until his tax return is lodged.

Foreign Residents and FRCGW

Foreign residents cannot obtain clearance certificates and are subject to withholding unless they provide a variation notice from the ATO. This notice adjusts the withholding rate based on factors such as reduced tax liability or the absence of a capital gain.

Example: Liam, a foreign resident, sells his property for $1 million. A creditor holds a $900,000 mortgage on the property, leaving insufficient funds to cover the withholding. Liam applies for a variation notice, reducing the withholding to $25,000 to reflect his estimated tax liability. The buyer withholds this amount and remits it to the ATO.

Special Considerations

FRCGW also applies to non-arm’s length transactions, where the sale price differs from market value. In such cases, the withholding is calculated based on the higher market value.

Example: Anna inherits a family property valued at $900,000 but sells it to her cousin for $700,000. The buyer must withhold 15% of $900,000 ($135,000) and remit it to the ATO, even though the sale price is lower.

Other situations requiring careful attention include:

• Deceased estates: Executors may need to apply for clearance certificates on behalf of the estate.
• Relationship breakdowns: Transfers under family law agreements may qualify for withholding exemptions.
• Variation to the rate of withholding: Where the actual CGT liability is less than the 15% FRCGW rate, e.g. main residence exemption, cost base and CGT rollovers.

What Happens After Withholding?

Vendors can claim credits for FRCGW amounts withheld by lodging their tax return. Refunds are issued if the withholding exceeds the actual tax liability.

Steps for Claiming Credits

1. Obtain a copy of the payment confirmation from the purchaser.
2. Declare assessable income, including capital gains or losses, in your tax return.
3. Claim the withheld amount as a credit.

Example: Olivia, a foreign resident, sells her property for $2 million, and the buyer withholds $300,000. After lodging her tax return, she calculates a CGT liability of $250,000. The ATO refunds the $50,000 difference.

How McKinley Plowman Can Help

While property settlement agents are obligated to arrange a clearance certificate and guide you through the impact of FRCGW on your property sale, there is comprehensive information you can find here on the ATO website.

For more complex circumstances, especially where foreign residents and joint ownership scenarios are at play, McKinley Plowman’s Tax Consulting team offers expert advice to:

• Assist with clearance certificate applications.
• Help foreign residents obtain variation notices.
• Ensure compliance and optimise tax outcomes.

Whether you’re selling your home or managing a complex property transaction, our team can guide you through the process and help avoid costly mistakes.

Looking Ahead – Plan Ahead to Avoid Surprises

Understanding Foreign Resident Capital Gains Withholding is crucial for anyone selling property in Australia. While settlement agents usually handle these requirements as part of their service, it’s important to have a basic understanding of the rules and how they’re applied. This knowledge can help you navigate the process smoothly and ensure everything is in order before settlement. If you believe your situation may be impacted by FRCGW, contact McKinley Plowman’s Tax Consulting team on (08) 9301 2200 or (08) 9325 2411, or visit our Contact Page to get tailored advice and support.

written by:

Steven Lisle

Tax Manager Steven Lisle has been part of the McKinley Plowman team since 2007, and in that time has built his repertoire upon delivering industry leading, up-to-date international and Australian tax strategies and consulting services. Steve's clients enjoy the optimised tax outcomes he provides them, especially where complex structures could otherwise lead to significant tax obligations.