Protecting yourself from the Foreign Resident Capital Gains Withholding Tax

The Government has recently made changes to the Foreign Resident Capital Gains Withholding Tax (FRCGW) – these changes can potentially also apply to Australian residents, but most are probably not aware of these changes. The recent changes to this tax rule could affect the sale of your family home.

The FRCGW was introduced in July 2016 with changes made in the 2017 Budget increases the number of purchasers of real estate who may get caught up in the net. The structure of this tax and its name may mislead Australian residents into thinking it doesn’t concern them; however it might if you do not adhere to the rules and criteria.

From the 2017 Budget, the withholding tax rate increased to 12.5% and the threshold for property was lowered from $2 million to just $750,000. Given the median house prices around Australia, this means that the tax covers many more real estate transactions throughout the country.

Example:  Home sells for $1.5 million – > potential of $184,500 in withholding tax.

Whilst originally designed to target foreigners to meet their tax obligations, it affects Australians if certain criteria isn’t met. This is mainly due to the fact the median house prices fall within the new property threshold the Government has placed. It’s important Australian residents understand how this tax works ensuring they will not be adversely affected.

If you are looking to sell a property you need to ensure you have a Clearance Certificate. If you don’t have the Clearance Certificate and the property sells for more than $750,000, the purchaser is required by this FRCGW rule to withhold 12.5% of the purchase price; passing it on to the Australian Taxation Office. (It can be claimed back in tax returns but for cash flow it’s probably best to make sure you have the Clearance Certificate in place).

Unfortunately it doesn’t matter if you are an Australian resident; all transactions are considered as a foreign resident until proven otherwise. So if the vendor doesn’t have a Clearance Certificate in place before the sale of property, the purchaser is liable to withhold the tax. If the purchaser fails to withhold the tax, they can be fined.
Confusion about this withholding tax can lead to delayed settlements. For many developers and investors there are also cash flow issues, which can affect their businesses.

As valued clients, we are advising you of this change because there are conveyancers and property lawyers that are not aware of, or do not understand, these changes or criteria. As it can affect both vendors and purchasers, we want to ensure everyone is aware of it and hopefully will not be affected. The FRCGW rule, including its recent update, has not been clearly promoted and we want to make sure you are informed in case your lawyer or conveyancer does not mention the requirement for a Clearance Certificate.

Even though there have not been stories of penalties being imposed for failure to withhold this tax on purchasers, it is only a matter of time as there are real estate transactions occurring without Clearance Certificates.

If you are unsure of your exposure to this tax rule, we ask that you involve your accountant in real estate purchases as these law changes require it. Conveyancers can’t give tax advice nor can they apply for your Clearance Certificate – this can only be done by you (the vendor), a lawyer or your accountant (Rubiix).

Whether buying or selling, if you are engaging in real estate transactions, please speak to us before signing anything so we can properly advise you of any implications you may face with relation to this tax.