What is FRCGW: Everything You Need to Know
The foreign resident capital gains withholding tax (FRCGW) affects all Australians, whether you’re a permanent resident, expat, or a foreign national. With the rules updated in 2017, we’ll unpack how this tax liability affects you. This comprehensive article will answer all your questions, including:
- What is foreign resident capital gains tax?
- What is FRCGW?
- What is an ATO clearance certificate?
As long as you understand the ramifications of the foreign resident capital gains withholding tax, buying and selling property in Australia should be a breeze.
What Is Foreign Resident Capital Gains Tax Withholding?
All foreign and temporary residents must pay capital gains tax (CGT) on taxable Australian real property. You won’t be able to claim specific CGT discounts or exemptions. CGT is a tax on the sale of an asset for a profit. Typically, you’ll pay CGT on stocks, bonds, precious metals, real estate, and property.
CGT is a percentage of the profits you make on the sale. For example, if Eloise, a permanent Australian resident, buys a property for $500,000 and sells it for $550,000 six months later, she’s made a capital gain of $50,000. She has to declare $50,000 on her income tax return, and the ATO will tax her at her individual rate.
However, you can reduce your CGT by 50% if you have owned the property for more than 12 months and it was your primary residence. Although, foreign nationals aren’t eligible for the discount.
Because foreign residents (for tax purposes) do not pay income tax in Australia, they have to pay FRCGW.
Since 2016, the Australian federal government has introduced foreign resident capital gains withholding. The tax applies to all real estate sold with a $750,000 or more market value – brought down from $2 million in 2017. Plus, the rate increased from 10% to 12.5%. Australian residents do not have to pay the tax. However, they have to apply for their exemption separately.
Do Foreign Residents Pay Capital Gains Tax?
Yes – just because you’re a foreign resident for tax purposes, it doesn’t mean that you won’t have to pay CGT on your real estate sale. The Australian Taxation Office defines three categories of tax residency:
- Australian resident
- Foreign resident
- Temporary resident
Your residency status for tax purposes may be different from your actual status. For example, if you’re an Australian citizen living and earning overseas, you don’t pay tax in Australia. Accordingly, you count as a foreign resident. On the other hand, you might classify as an Australian resident for tax purposes even if you are not an Australian citizen.
Therefore, you must check your tax residency status to avoid accidentally disobeying the rules.
How does your residency affect your capital gains tax?
- Foreign and temporary residents only pay CGT on taxable Australian property. For instance, if you rent out a property in Australia, the rental income is subject to income tax. Plus, you must pay CGT in Australia when you sell the property.
- For property acquired after May 2012, foreign and temporary residents aren’t eligible for the 50% CGT discount.
- Foreign residents cannot apply for the CGT principal residence exemption.
- If you change residency – become an Australian resident or stop being one – CGT rules will vary.
How Much Is FRCGW for Non-residents?
The capital gains withholding rate is 12.5%. If you’re a foreign resident selling a property valued at more than $750,000, the buyer must withhold 12.5% of the purchase. They send the money directly to the Australian Taxation Office.
At the end of the tax year, the foreign resident vendor must lodge a tax return, declaring their total capital gains and Australian assessable income. They will need a Tax File Number (TFN) if they don’t have one already. The vendor may then claim credit for any withholding amount paid to the ATO.
What Are the FRCGW Rules?
The withholding tax is the responsibility of both the vendor and purchaser. The payment obligation dictates that if the seller is a foreign resident, the purchaser must withhold 12.5% of the purchase price for the ATO.
All types of Australian property fall under this tax if the market value is more than $750,000. Before 2017, the rules applied only to properties worth $2 million with a tax rate of 10%. However, the lowered threshold has impacted most Australians. $750,000 is less than the current median house price in Australia’s most popular cities – Sydney and Melbourne.
As a result, most families in Sydney and Melbourne are now affected by the foreign resident capital gains withholding tax. Additionally, the higher withholding rate of 12.5% means that the buyers are responsible for more significant money. They are subject to more considerable penalties if they do not comply.
Australian residents for tax purposes can avoid the purchaser withholding tax by applying for a clearance certificate. For other types of assets, the foreign resident can provide a vendor declaration to the purchaser. Foreign vendors can apply for a variation certificate.
When the Rules Apply
The purpose of foreign resident capital gain withholding tax is to encourage the collection of foreign CGT liabilities. The rules apply when:
- A purchaser (whether an Australian citizen or not) buys a CGT asset from one or multiple vendors. It also applies to the purchase of numerous properties.
- If there are multiple vendors, at least one is a non-resident at the time of one of the property transactions.
- The transaction took place on or after July 2016.
It’s the purchaser’s obligation to withhold the 12.5% of the purchase price unless the vendor can provide a valid clearance certificate. Even if the vendor is an Australian resident, the buyer must pay the withholding tax on the settlement date if they cannot show a clearance certificate. The foreign withholding tax is the default situation.
Asset Types
The rules apply to all of the following asset types:
- Real property: all taxable Australian real property worth more than $750,000. This includes vacant land, buildings, residential property, and commercial property. It also refers to mining, quarrying, or prospecting rights if the material is in Australia.
- Leases over real property.
- Indirect Australian real property interests – for example, a membership interest in an Australian entity whose value comes from Australian real property. This might include shares in a company that owns land or property on Australian soil.
Why Was FRCGW Introduced?
The ATO introduced the foreign residents capital gain withholding tax to force foreign residents to declare tax payable on capital gains. There was a risk that funds from a property transaction went offshore in the past. Accordingly, such property capital gains are difficult for the Australian Taxation Office to recover.
The downside of the withholding tax is that it affects both Australian citizens and non-residents alike. While the clearance certificate makes it easier for Australian resident vendors, it’s still another aspect of the property transaction to remember.
Claiming a Credit for Payment of FRCGW
You don’t need to say goodbye to your money forever as a foreign resident. The purchaser pays the withholding tax directly to the ATO. The foreign resident vendor has to lodge a tax return at the end of the financial year. Tax returns should declare all Australian assessable income, including any capital gains from the selling Australian property.
Foreign vendors must apply for their credit. Say you sell a property for $100,000. 12.5% of the purchase price is $125,000 – a significant sum. Moreover, you must apply for a clearance or variation certificate if you’re eligible. Otherwise, you may face serious cash flow problems while the ATO holds your money.
You’ll need a tax file number – it’s easy to apply for one if you don’t already have one. You can claim credit for any withholding tax paid to the ATO at this stage. If the purchaser fails to withhold the tax, they may face a penalty plus interest. The fine is substantial because the Australian Taxation Office might struggle to recover the funds from the foreign vendor.
In some circumstances, the foreign vendor may submit an early tax return. However, if they’re not eligible, they must wait until the end of the financial year. The ATO will only return credit once the vendor lodges an Australian income tax return.
What Is the Market Value?
Let’s clear up a few terms. For the most part, market value is the purchase price of the property. If the vendor and purchaser negotiate a price, the ATO will take this price as a proxy for the market value. However, this is only the case if the negotiations occur at arm’s length – as in, between real estate agents and solicitors.
For example, if the seller and buyer are related and negotiate a deal privately, the purchase price does not equal the market value. In this case, the purchaser would need to find a separate professional property valuation.
It’s worth bearing in mind that if the purchase price is assumed as the market value, this is the price before any adjustments at the settlement date. The market value doesn’t include council rates, water charges, and strata levies. Therefore, apply the threshold of $750,000 before these adjustments.
Who Is the Vendor?
The vendor is the person, persons, or company who holds the asset’s legal title. For example, a property owner could sell a house worth more than $750,000. It could also be a trustee or custodian who holds the property’s title on behalf of a beneficiary.
Who Qualifies as a Foreign Resident?
We mentioned how to check whether you count as a foreign resident for Australian tax purposes. Well, what if you’re the buyer? The consequences for not complying with the withholding obligation can be severe – and it’s the purchaser who pays the price. Therefore, you need to know how to assess whether the vendor you’re buying from is a foreign resident or not.
They are treated as foreign vendors if they cannot provide a valid clearance certificate of vendor declaration by the settlement date. All Australian residents can obtain a clearance certificate quickly. It must be provided to the purchaser by settlement. Otherwise, they must withhold 12.5% of the purchase price. A declaration states whether or not the vendor is a resident.
If you’re purchasing a property from multiple vendors, you must withhold the funds if any one of them is a foreign resident. It doesn’t matter if four out of five vendors can supply a clearance certificate. If one is a foreign vendor, the foreign residents capital gain withholding tax applies.
Another qualification is the purchaser applying the ‘knowledge condition’.
Knowledge Condition
We’ll cover this briefly as it primarily refers to indirect Australian real property interests. To satisfy the knowledge condition, the purchaser must:
- Have reasonable grounds to believe that the vendor or one of the vendors is a foreign resident
- Or, does not reasonably believe that the vendor is an Australian resident
The purchaser must have a record that suggests the vendor has an overseas address or made a payment outside Australia.
I'm an Australian Citizen; Why Am I Classed as a Foreign Resident?
While you might be a born and bred Aussie, if you live and earn money overseas, you’re a foreign resident for tax purposes. Remember that the withholding tax only applies to foreign vendors. If you’re buying a property in Australia while living abroad, you only need to worry about the vendors’ residency.
However, if you’re an Australian citizen moving abroad, if you ever decide to sell your property back in Oz, the ATO will classify you as a foreign resident. To ascertain whether you’re a foreign citizen for Australian tax purposes, ask yourself whether you pay income tax in any country other than Australia.
How Does FRCGW Impact Expats?
As an Australian expat living abroad, the withholding rate will impact you if you own property back in Australia. Selling property as an Australian expat isn’t necessarily a wise move. You may lose significant sums in tax.
Firstly, as an expat, you’re no longer eligible for the principal residence exemption on your Capital Gain Tax. Australian residents only have to pay 50% CGT on their main property. As an expat, the ATO no longer considers your Australian house as your primary address. It doesn’t matter whether you rent it out or use it as a second home. If you sell the property, you will have to pay 100% CGT.
Secondly, you are not excluded from the withholding tax if you choose to sell. Although you are an Australian citizen, the purchaser will have to withhold 12.5% of the purchase price. Once you submit your tax return detailing all your gains, you can claim credit for the withheld amount.
However, as an expat, you might be able to avoid the withholding rate. However, you need to prove that you’re an Australian resident for tax purposes. Unfortunately, if you’re a non-resident expat living and working abroad, it’s unlikely you’ll get a clearance certificate. Luckily, you might be eligible for the variation certificate.
What Is a Variation Certificate?
Like clearance certificates, variation certificates help vendors avoid the withholding tax. If you’re not entitled to a clearance certificate, you may be able to get a variation certificate. For instance, if you’re a non-resident Australian expat. In some circumstances, paying FRCGW is inappropriate. Therefore, you can apply for a variation certificate.
Such a situation might be if the property is not liable to capital gains tax because the vendor can claim the main residence exemption. The ATO will carefully consider these circumstances on a case by case basis. If you have rarely – or never – been a tax resident, you may struggle to get approval for a variation certificate from the ATO.
Unfortunately, as expats haven’t been able to claim the CGT main residence exemption from July 2020, this practice has largely disappeared.
In 2022, the vendor can only apply for a variation certificate if they are not making a capital gain on the transaction. For example, if you lose money during the sale.
What Is an ATO Clearance Certificate?
A clearance certificate is a document awarded to Australian citizens for tax purposes. The vendor must provide the certificate to the purchaser to mitigate any uncertainty about their residency status. As a purchaser, you must ensure that the vendor has a clearance certificate before proceeding with the transaction without paying the withholding rate.
If the vendor cannot show a valid clearance certificate, the purchaser must pay 12.5% of the purchase price to the ATO.
A certificate is valid for 12 months – the vendor can use the same one for multiple properties. However, the vendor must ensure they apply for it ahead of settlement. The ATO does not issue retrospective clearance certificates.
If you do not provide a clearance certificate in time, you will lose 12.5% of the property price until the end of the financial year, where you can claim it back on your Australian tax return. While this might not seem like a big deal, 12.5% is a significant sum. Going without could have severe adverse effects on your cash flow.
What Makes a Clearance Certificate Valid?
A certificate is valid for 12 months for the vendor listed on the document. As long as it is valid during the settlement period, it doesn’t matter how far off the actual settlement is. Once the purchaser has seen the valid clearance certificate, they do not need to question the vendor’s residency. However, they can contact the ATO if they have any doubts.
If there are multiple vendors, they must have a clearance certificate each. For example, joint tenants each need to apply for a clearance certificate. To be a valid certificate, the vendor must make sure that all the details are correct:
- The vendor’s name on the certificate must be the same as the name on the legal title of the property.
- The date the certificate provided must fall within the 12 months that the clearance certificate is valid.
- The vendor must provide a clearance certificate before the settlement.
Note: if the name varies slightly or has changed, the certificate is still valid if you have reasonable evidence that you’re the same person (e.g. a marriage certificate). The ATO won’t reissue the clearance certificate.
If the certificate doesn’t meet the above requirements, the purchaser must withhold 12.5% of the purchase price.
What Are the Benefits of Providing a Clearance Certificate?
If you’re an Australian resident vendor, providing a clearance certificate could save you and the purchaser a great deal of effort. Providing a valid clearance certificate prior to the settlement relieves the purchaser of the extra responsibility to pay the withholding rate. Additionally, it means that the vendor can receive the entire settlement proceeds.
How Do I Get an ATO Clearance Certificate?
It’s relatively simple to apply for your ATO clearance certificate. Remember, each Australian tax resident must apply for their own certificate in their name only. Even if you don’t lodge a tax return, for example, a pensioner not earning income must still obtain a clearance certificate.
You can complete the clearance certificate application online or by phone. You can get solicitors, tax agents or other representatives to apply on your behalf.
When should the vendor apply for the clearance certificate? Earlier is better. You should complete the application at least 28 days before you need it. However, it’s possible to apply for a certificate before you even list the property for sale.
Generally speaking, the ATO sends your clearance certificate via email. If you cannot supply an email address, they will send it via mail.
How Long Does It Take To Get a Clearance Certificate From the ATO?
Applications might take around 28 days to clear. The quickest way to ensure you get your clearance certificate in time is to apply only. Make sure you leave plenty of time to avoid delaying your settlement and the sale proceeds without the purchaser taking the withholding amount. The online forms are straightforward.
However, unusual circumstances might mean the ATO has to intervene manually. Such situations might take longer than 28 days.
An Example
So, let’s look at an example to piece it all together.
The vendor, Rachael, is an Australian citizen living in Hong Kong. She doesn’t pay income tax in Australia. Therefore, the ATO classifies her as a non-resident. She wants to sell her Australian property at an agreed market value of $800,000. As this is above the foreign resident capital gains withholding threshold, the purchaser asks to see her clearance certificate.
However, Rachael cannot apply for a certificate. Nor is the property eligible for a variation certificate. Therefore, the purchaser must withhold 12.5% of the purchase price – $100,000.
Rachael lodges her tax return to the Australian Taxation Office at the end of the financial year. This details all her capital gains and a claim for the credit of the withheld tax amount. The ATO will return any withheld sums and charge her the appropriate CGT amount.
Which Assets Are Excluded?
Not everything is subject to the withholding tax. Here’s a list of some assets that are excluded from the tax:
- Taxable Australian real property worth less than $750,000.
- An indirect Australian real property interest with a market value of less than $750,000.
- Transactions occur through an approved stock exchange (not applicable to buying and selling properties).
- Property transactions that are already subject to another withholding obligation.
- Securities lending arrangements (these aren’t subject to CGT for the vendor).
- Transactions where the foreign vendor is bankrupt, in a debt or personal insolvency agreement under foreign law.
Do the Rules Apply if the Asset's Market Value Is Exactly $750,000?
Yes, the rules dictate that withholding occurs with any property with a market value of $750,000 or above. If the agreed purchase price isn’t yet settled or is going to auction, then the vendor may wish to apply for a clearance certificate just in case.
If you’re an expat and the property price is just over the threshold, you may wish to lower your asking price to avoid the purchaser taking the withholding amount.
What Are the Penalties for Non-compliance?
Non-compliance results in severe penalties.
If the vendor fails to obtain a clearance certificate, the only consequence is losing the 12.5% withheld amount until the next financial year. This might result in a cash flow issue. However, there is no legal retribution.
Unfortunately for the purchaser, the tax obligation falls to them. If the purchaser fails to withhold the amount, the ATO might impose a penalty of $2,100. Additionally, they might force the purchaser to pay the withheld amount out of their pocket – a potentially hefty sum.
Using our earlier example, if the purchaser had failed to withhold the $100,000 from Rachael, they would have to pay it themselves on top of the $2,100 penalty. Moreover, the ATO might also enforce a general interest charge. Therefore, as a purchaser, you have to ensure the clearance certificate is valid.
In Summary,
The capital gains withholding tax is a new but costly rule. Whether you’re an Australian permanent resident, foreign national, or expat, it affects everyone. Purchasers and vendors alike should understand the ins and outs of the withholding tax; otherwise, they risk facing severe consequences.
As an expat, you’ll likely come into contact with the FRCGW rules. Speak to a professional for tax advice if you’re unsure what restrictions and exemptions apply to you.
Frequently Asked Questions
Do I Need an ATO Clearance Certificate?
Suppose the market value of your property is more significant than $750,000. In that case, you will need to apply for an ATO clearance certificate to avoid the purchaser withholding 12.5% of the sale proceeds. However, if you’re not an Australian tax resident, then you won’t be eligible for a clearance certificate.
What Is CGT Withholding Tax?
CGT withholding tax – also known as FRCGW – is a recent rule to force foreign residents to pay CGT tax. When a foreign resident vendor sells a property greater than $750,000, the purchaser must pay 12.5% of the property price to the ATO. The vendor can reclaim the withheld amount in their tax return.
How Do I Know if I Have to Pay Capital Gains Tax?
If you sell an asset in Australia for a profit, you will have to pay capital gains tax. There are a few exemptions to this. For example, if you’ve owned the property for more than 12 months and it is your primary address.
Why Do I Need a Clearance Certificate?
Australian residents need a clearance certificate to prove to the purchaser that they are not foreign residents. Otherwise, the purchaser must withhold 12.5% of the purchase price and pay it to the ATO.
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