This article is written for sellers (vendors) of Australian real estate (house, unit, factory, farm), who are non-residents of Australia.
The foreign resident capital gains withholding (FRCGW) payments regime is enshrined in the Taxation Administration Act 1953 (TAA 1953).The FRCGW payments regime first came into effect on 1 July 2016.
In this regard, Subdivision 14-D of Schedule 1 to the TAA 1953 imposes a non-final withholding obligation on the purchaser of certain Australian real estate where the property is acquired from a foreign resident.
The relevant schedules of the TAA1953 were updated in Treasury Laws Amendment (Foreign Resident Capital Gains Withholding Payments) Act 2017. Thisupdate received royal assent on 22 June 2017.
The 2017 update:
- Increased the withholding rate from 10% to 12.5%
- Decreased the sale Value threshold from AU$2m to AU$750,000
For property transactions on or after 1 July 2017 the new rates apply.
Purpose of the Rules
These rules require Purchasers of Australian property valued in excess of $AU750,000 to withhold 12.5% of the purchase if the seller (vendor) is a non-resident.
Point to note: In Australian legislation the term “non-resident” is used to describe persons not ordinarily resident in Australia. Rarely is the term “Foreign resident” used. When you read this ‘Foreign resident’ means ‘non-resident’ for Australian tax purposes.
Furthermore “seller” means “vendor” and vice versa
Where an Australian property is sold for AU$750,000 or more, the FRCGW rules may apply.
The starting point when selling an Australian property is to ask whether you as a seller are
- An Australian tax resident, or
- a non-resident (aka “Foreign Resident”).
- If you are an Australian tax residentand sell an Australian property for AU$750,000 or more, you will need to apply for, and receive a Capital Gains Withholding Clearance Certificate.
For it to be effective in avoiding the withholdingof sale proceeds, the seller must provide it to the purchaser. This must occur before settlement
- If you are a non-resident seller of Australian property, you will not receive this certificate, and the purchaser (with help from aconveyancer) will be required to withhold 12.5% of the sale price. The purchaser will then provide that withheld amountdirectly to the ATO at the time of settlement.
- If you are a purchaser, you will use the Foreign resident capital gains withholding purchaser payment notification
Tax for the seller of the property?
The FRCGW is not a FINAL tax. It is simply an “estimate”.
What this means is that an Australian Tax Return is still required for filingin the financial year when the property is sold.
The final tax (as worked out on the tax return) and the estimate (FRCGW) is then reconciled, and the seller of the Australian property:
- Receives a refund for any overpaidFRCGW; or
- Is given a bill (Notice of Assessment) for ‘catch up’ tax
Consider the following Case Study:
Michelle was originally a resident of Australia.
She purchased anapartment in Sydney in 2003 for $515,000.
She never lived in it, she just rented it out (it was an “investment property”)
In 2010 Michelle moved to the UK to accept a job opportunity and became a non-resident of Australia.
Michelle made a life in the UK and decided never to return to Australia. She continued to collect rental income from the unit.
(In May 2012 the non-resident CGT Concession rules changed denying Michelle the 50% CGT discount from this point onwards)
In May 2012 because of a change in law, her tax agent suggested Michelle get the property appraised. It was valued at AU$850,000
(IN July 2016 the FRCGW Rules were introduced and updated from 1 July 2017)
In August 2019 Michelle sold the property for $1,050,000.
The purchaser withheld $131,250 from the proceeds under the FRCGW regime because
- Michelle couldn’t provide a certificate proving she was an Australian resident; and
- The property was valued in excess of AU$750,000
Upon settlement Michelle only received $919,750 ($1,050,000 less the FRCGW of $131,250)
Working out the FINAL TAX
Accordingly, and taking all of the above into consideration, Michelle with the help of her tax agent:
- Calculated a Gross Gain on sale of $496,858 (after purchase and selling costs like advertising, agent commission and stamping duties were deducted) but;
- Calculated a Taxable Capital Gain of $348,292.50 (after taking into consideration the discounts applicable before the non-resident laws changed in May 2012).
Michelle’s FINAL tax worked out to be $138,281.63.
As $131,250 was already withheld under FRCGW, there is an estimated balance $7,031.63 of tax to pay, which is required to be paid via the filing of an Australian tax return.
We note Michelleis required to lodge an Income Tax Return, and we are able to file this on her behalf.
Do I lodge?
Q: Lets say the FRCGW resulted in an overpayment of the calculated final tax?
A: Of course – Michelle should engage a tax agent to lodge a tax return as soon as possible – and seek a refund of the overpayment.
Q: We often get asked whether as a non-resident Michelle would bother to lodge if she is now in the UK, unlikely to return to Australia and has $7k to “catch up”. Who’s going to chase her?
A: By law – Michelle must lodge an income tax return. As a non-resident with an Australian sourced property she is required to lodge and pay the “catch up”.
If Michelle ever returned to Australia to live and work the obligation to lodge and pay remains.
And of course the longer she leaves it the worse (penalties and interest) it will be.
If you are a non-resident (or former resident) of Australia and have Australian real estate with a view to sell, please contact us to understand your obligations after the FRCGW regime applies.