These amendments increase compliance obligations for transactions involving Taxable Australian Property (TAP).
Background
Introduced in 2016, the FRCGW rules aim to ensure appropriate tax is withheld by purchasers or lessees of direct or indirect interests in TAP. TAP includes assets such as vacant land, residential and commercial properties, buildings, leases over real property, and mining, quarrying, or prospecting rights in relation to minerals, petroleum or quarry materials located in Australia. Please read our previous article to understand the expanded definition of TAP to which the FRCGW may apply.
These requirements must be considered by parties to transactions that involve affected TAP, regardless of whether the party is an Australian resident.
Until 31 December 2024, the rules applied an FRCGW rate of 12.5 per cent of the purchase price and a minimum market value for the TAP CGT asset (including leases of TAP for a premium) of AUD$750,000 or more.
What's changed?
As of 1 January 2025:
- the withholding tax rate has increased from 12.5 per cent to 15 per cent, and
- the $750,000 de minimis threshold no longer applies, bringing all TAP transactions under the FRCGW regime.
These changes are intended to address Treasury’s concerns that the previous FRCGW rate did not collect enough tax to keep up with the capital gains tax (CGT) that should be collected on the disposal of foreign-held Australian property, particularly due to the appreciation in value of Australian real property in recent years.
Key obligations
Purchasers or lessees must withhold FRCGW at settlement of a transaction unless the vendor or lessor provides an ATO clearance certificate confirming their status as an Australian tax resident, or if a non-resident, provides an ATO variation that specifies a lower applicable FRCGW rate. Failure to withhold the required FRCGW amount may result in penalties and interest being levied.
ATO clearance certificates for Australian residents are valid for 12 months from the date of issue, and in our experience are typically issued within a week for applicants who are up to date with their Australian tax compliance. However, the ATO has stated publicly that this process can take up to 28 days. If a clearance certificate is not provided, the purchaser is obligated to remit the required FRCGW amount to the ATO.
Foreign resident vendors or lessors cannot obtain an ATO clearance certificate. However, they may apply for an ATO variation to reduce the FRCGW rate, potentially down to 0 per cent, if they can demonstrate that the prescribed 15 per cent rate is excessive. Typical reasons for a variation include:
- The transaction results in no capital gain (for example due to CGT rollover or exemptions)
- The transaction results in a capital gain, but the non-resident has current year or carry-forward tax losses or net capital losses to offset the capital gain, fully or partially, or
- The FRCGW results in there being insufficient funds remaining to discharge a mortgage over the property or to meet creditor foreclosure requirements.
Providing thorough supporting documentation (which may include CGT calculations) is critical to ensure the ATO processes the variation in a timely manner.
The FRCGW can apply to sales of indirect Australia real property interests, such as shares in companies or interests in trusts which own real property. As such, thorough due diligence is essential to confirm whether withholding obligations apply in these circumstances.
The FRCGW is a PAYG withholding amount and is not a final tax. This means that if a party is subject to FRCGW which exceeds the income tax payable on the underlying CGT event, that party may choose to lodge an income tax return to disclose the relevant CGT event and claim the excess FRCGW withheld as a refund.
How you can prepare
Whether or not you are an Australian resident, if you are involved in the sale, purchase or lease of TAP you must consider the updated FRCGW rules with the assistance of your tax and legal advisers to ensure that your transaction may complete in a timely manner without undue tax compliance, liabilities or penalties.
For assistance in navigating these rules, including applying for ATO clearance certificates or variations, please contact your Grant Thornton tax representative.
