What you need to know about foreign resident capital gains withholding
First introduced in the mid 1980s as part of a suite of tax reforms, capital gains tax is a tax charged on – what else? – capital gains.
That is to say, it’s tax you need to pay on any profit made from the sale of any capital assets such as real estate or shares.
Much newer is Foreign Resident Capital Gains Withholding, or FRCGW for short.
First introduced in the 2016-2017 tax year, FRCGW is a tax targeted specifically at the sale of specific assets from foreign residents. Even if you’ve lived in Australia your entire life, if you are buying a property you may still have to withhold!
But first, what are the FRCGW rules?
Are you buying Australian property? Is the seller a foreign resident? Does the value of the Australian asset you’re buying exceed $750,000 in value?
If so, you may be required to withhold part of your payment for the ATO.
While originally written to target real estate assets like land and buildings, it also includes other classes of “real” assets like:
- Leases of property
- Indirect property ownership (for example, shares in companies that own property themselves)
- Options or rights for property
- Exploration and mining rights on Australian territory
Buyers of any of these assets are required under the new regime to withhold 12.5% of the purchase price when buying assets from a foreign resident.
It’s important to note that the ATO uses a different definition of “foreign resident” from the immigration department. According to the ATO, a foreign resident is someone who:
- Doesn’t permanently live in Australia
- Resides in Australia for less than half the year (183 days)
How does this differ compared to regular capital gains tax?
For starters, while FRCGW applies to all real asset sales, it’s targeted primarily at foreign residents. Australian sellers can apply for exemptions – see below for details.
And secondly, FRCGW is charged at a 12.5% rate on purchase price and not capital gains. Therefore, calling it a “capital gains” tax is inaccurate.
“I’m not a foreign resident… how does this affect me?”
It’s important to note that the FRCGW isn’t a separate tax – rather, it’s an amendment to existing capital gains tax.
That means while it was written with foreign residents in mind, as part of capital gains tax, the FRCGW rules affect all property sales, including Australian residents buying and selling property.
When first written, FRCGW was targeted at transactions exceeding $2 million in value. For most everyday Australians, this wasn’t an issue – not all of us own assets worth that much.
As a result, very few Aussies were directly affected by this. As part of the 2017-2018 budget however, a few changes were made to this regime that impact many more Australians:
- Firstly, the withholding rate was raised from 10% to 12.5%
- More importantly, the threshold was dropped from $2 million to $750,000
That means even if you’re an Australian resident buying your dream home, you’ll still be affected by this regime.
Exemptions
Thankfully, the ATO has put an exemption in place for instances where FRCGW doesn’t apply.
The first and most obvious situation is when the seller is Australian. Like we mentioned above, this regime applies to everybody, including Australians selling their homes or business properties.
In this case, buyers can avoid the 12.5% withholding by obtaining an individual clearance certificate. So long as the seller (vendor in ATO parlance) remembers to include documentation that establishes their residency status, purchases won’t need to withhold.
Additionally, Australians who spend a lot of their time residing overseas can apply for an exemption if they can prove they are still an Australian resident for tax purposes.
As a general rule-of-thumb, there are three main tests for residency:
- Your permanent home is in Australia
- You spend at least half the year (183 days) living in Australia
- You’re a government employee posted overseas (embassy staff, serving military)
Provide documentation that proves any one of these three, and your transaction will be exempted from FRCGW.
Click here to learn more about how residency for tax purposes is established.
Call a tax accountant for foreign capital gains withholding help
Selling your property? Can’t wrap your head around FRCGW? Don’t have the time to apply for a clearance certificate yourself?
If you need help with anything tax-related (including FRCGW), get in touch with a Melbourne tax accountant.
Bruce Edmunds & Associates has helped businesses and individuals alike wrap their heads around their tax burdens ever since 1966.
As personal and business tax accountants, we’ve seen it all. Our qualified and experienced team of accountants can help you understand FRCGW and can calculate and file for exemptions on your behalf.
Get in touch with our team today to learn more about FRCGW, and how it affects you. Call us today on (03) 9589 5488 or request an appointment online.
