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The foreign resident CGT withholding rules were introduced in 2016 as a way to ensure non-residents pay tax on the sale of taxable Australian property.
Withholding applies to Australian tax residents unless you obtain a CGT withholding clearance certificate from the Australian Taxation Office (ATO).
This means if an Australian tax resident does not have a clearance certificate an amount is withheld on settlement and paid directly to the ATO. For Australian tax residents you get the amount withheld back when you lodge your tax return, however it will have an impact on your cashflow if you are not expecting withholding to apply. 
With effect from 1 January 2025, changes to the foreign resident CGT withholding tax on the sale of taxable Australia property have occurred as follows:
- The rate of withholding has increased from 12.5% to 15% of the sale price; and
- Withholding now applies to the sale of all Taxable Australian Property, regardless of the value. Prior to 1 January 2025, withholding only applied to the sale of taxable Australian property with a value over $750,000.
Australian Residents – Action required
Australian tax resident taxpayers selling property will be required to obtain a clearance certificate from the ATO prior to settlement of any taxable Australian property. The application for a clearance certificate should be done prior to listing the property for sale to ensure sufficient time to receive this prior to settlement. Whilst most clearance certificates are issued within a short timeframe, the service standard is 28 days and the implication of not holding a clearance certificate could be a delay in settlement or the requirement for the purchaser to withhold and remit the tax to the ATO, thus causing a significant delay in receipt by the vendor.
It is important to note that the withholding applies to all real property sales so even if you are selling your main residence, which is most likely exempt from taxation, you will need a clearance certificate otherwise 15% of the sale proceeds will be remitted to the ATO
Withholding can also apply to indirect interest in Australian real property, such as where shares are held in companies whose value are primarily comprise taxable Australian property. Consideration should therefore be put toward whether a clearance certificate is required in relation to share transactions or restructures that result in a change of ownership of companies whose value is substantially land or other real property interests.
Non-residents
Non-residents are not entitled to obtain a clearance certificate, however non-residents may seek to obtain a variation to their withholding rate. A variation may be sought for many reasons, including:
- The withholding tax is greater than the tax payable on the capital gain;
- No capital gain arises on the transaction due to a capital loss or application of a CGT roll-over;
- Tax or capital losses are available to reduce the capital gain;
- A creditor with a mortgage or security over the property will be disadvantaged by the payment of the withholding.
Given the variation process requires evidence to be provided to the ATO that the withholding tax is greater than the expected tax liability arising on sale, it is imperative that non-residents act early to determine the extent of probably gains from the sale of taxable Australian property. We would recommend the following steps to be taken in a variation application:
- At the time that the property is being listed, the taxpayer seeks to prepare an estimated capital gains tax calculation;
- Immediately following signing of the offer and acceptance, the tax calculation is updated with final figures and where appropriate, a variation request lodged with the ATO.
- Service standards to provide an approved variation are up to 28 days, so settlement may need to be flexible to allow sufficient time for receipt of this from the ATO. It may be appropriate to include as a condition precedent to settlement the receipt of an approved variation for withholding tax.
The foreign resident CGT withholding tax is not a final tax and therefore the non-resident is required to lodge an income tax return disclosing the capital gain for the financial year in which it arises. During this process any additional tax arising from settlement adjustments or other unknown items can be included in the calculation of the final tax liability.
For Australian tax residents, your Settlement Agent, Lawyer or Accountant can apply for the clearance certificate on your behalf. Once obtained, a certificate is valid for 12 months so can be used for multiple property sale transactions.
FOR MORE INFORMATION
If you would like to learn more about the topics discussed in this article, please contact your local RSM office.
