As of the 1st January 2025, the financial landscape for foreign residents selling Australian property has fundamentally changed. The government is increasing the withholding tax rate and, critically, removing the price threshold entirely. This means a significantly larger portion of your sale proceeds will be paid directly to the ATO at settlement under the foreign CGT tax withholding regime, impacting every transaction, regardless of value.
As leading commercial lawyers for Greater Western Sydney, Coleman Greig provides the expert guidance needed to navigate these changes and protect your cash flow.
What is the Foreign Resident Capital Gains Withholding (FRCGW) Tax?
Simply put, this is a measure to ensure that foreign residents meet their Australian tax obligations when they sell property. It is not a new tax, but an upfront collection of your estimated Capital Gains Tax (CGT), paid by the purchaser directly to the ATO at settlement.
Key features of the regime include:
- It applies when a foreign resident sells Australian property.
- The withholding amount is collected at settlement by the purchaser.
- It is not a final tax—it’s a pre-payment credited against your actual tax liability when you lodge a return.
- It captures direct property sales and certain indirect interests, including withholding on property in NSW.
For example, under the current rules, a UK resident selling an investment property in Parramatta for $800,000 now has $120,000 (15%) withheld at settlement.
Get expert Commercial Taxation Advice from our team.
Key Changes to the FRCGW Regime – What You Need to Know
On the 1st January 2025, two key changes came into effect, meaning more foreign sellers will be affected by this regime, and at a higher cost:
- Rate Increase: The amount withheld increased from 12.5% to 15%.
- Threshold Removed: The regime will apply to all properties, not just those valued over $750,000.
This means even a $400,000 townhouse in Western Sydney, previously exempt, will now trigger a $60,000 withholding tax. This change to the tax rate for foreign residents at the point of sale makes proactive financial planning essential.
What Does This Mean for Foreign Investors in Australian Real Estate?
The primary impact is on your cash flow. While you can claim a credit for the withheld amount when you lodge your Australian tax return, we know that waiting months for a refund can disrupt your next steps—whether you plan to reinvest or transfer funds overseas.
Fortunately, there are two crucial ATO tools to manage this:
- ATO Foreign Resident Clearance Certificate: This is the ‘off switch’. It is for vendors who are Australian residents for tax purposes. Providing the purchaser with this removes the withholding obligation entirely.
- Foreign Resident Capital Gains Withholding Variation: This is for foreign residents. It allows you to reduce the upfront withholding amount to better reflect the actual capital gain you have made.
Our Mergers & Acquisitions team can assist you with complex transactions.
How to Apply for a CGT Withholding Variation or Clearance Certificate
Applying for these documents well ahead of settlement is key to avoiding delays and financial stress:
- Applying for an ATO CGT Clearance Certificate: If you are an Australian resident for tax purposes (which can include expatriates living abroad), this certificate proves your status to the buyer. You must provide it before settlement to prevent any funds from being withheld.
- Applying for a Foreign Resident Capital Gains Withholding Variation: This is the most powerful tool for foreign sellers. Consider an investor who bought a Sydney apartment for $900,000 and is now selling for $950,000. Without a variation, a staggering $142,500 would be withheld upfront, despite the profit being only $50,000. By applying for a variation with evidence of the purchase price, the ATO can reduce the CGT withholding to an amount that fairly reflects the actual tax payable.
In the past, vendors could provide a written declaration of their residency. While this still has a place in specific, complex scenarios involving company structures, the primary tools for property sales are now the official Clearance Certificate and Variation Notice from the ATO.
Key Takeaways – What Do These Changes Mean for Foreign Property Sellers in Australia?
The financial impact of these changes is significant, especially on the day of settlement. The new rules will have a tangible impact on the net proceeds you receive from your sale:
- For a $2 million property in Sydney, the amount withheld upfront increased from $250,000 to $300,000.
- For a $700,000 property, which was previously exempt from any withholding tax, a significant $105,000 will now be held back by the ATO.
To protect your interests and manage your cash flow effectively, your next steps should be clear and proactive:
- Plan Ahead: Do’nt wait for a buyer. Assess your likely Capital Gains Tax position the moment you decide to sell.
- Apply Early: ATO processing times can vary significantly. Lodge your application for a clearance certificate or variation as early as possible to ensure it’s processed and ready for settlement.
- Seek Expert Advice: Handling Australian tax law is complex. Engaging an expert for guidance can save you significant time, stress, and a substantial amount of money at settlement.
Speak to our Commercial Property Law experts and make sure you are prepared.
Get Expert Taxation Advice for Foreign Investors – Contact Coleman Greig Lawyers
At Coleman Greig, we combine technical in taxation expertise with extensive local knowledge of Sydney’s property market. As Greater Western Sydney’s leading law firm, we guide foreign investors through every step, from applying for variations to structuring transactions for compliance and efficiency.
We understand the challenges of managing an Australian investment property from afar. Get in touch with our expert team today to make sure you are fully prepared.
