Changes to foreign resident tax withholding impact buyers and sellers of Australian real estate

The changes, included in the Treasury Laws Amendment (2024 Tax and Other Measures No.1) Bill, passed into law on 10 December 2024, amending the FRCGW regime from 1 January 2025.

The FRCGW, a tax required to be withheld by the purchaser, only applies where a lease premium, a one-time payment to secure or extend a lease, is paid for the grant of the lease. Tenants must withhold 15% of the lease premium to remit to the Australian Taxation Office (ATO).

Deanne Sevastos, an expert in property law at Pinsent Masons, said: “These recent changes have significant implications for property transactions in Australia.”

“The increase in the withholding rate to 15% and the removal of the value threshold mean that all real property transactions involving foreign sellers are now subject to this regime,” she said.

“Whilst this change ensures better compliance and tax collection from foreign residents, it also places additional procedural requirements on both buyers and sellers, such as the need for clearance certificates and the risk of severe penalties for non-compliance.”

All Australian residents for tax purposes, selling or disposing of Australian real property, must have a clearance certificate and produce it to the buyer at, or before, settlement.

Buyers or lessees must withhold FRCGW at settlement of a transaction unless the seller or landlord 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.

Vanessa Scrivener, an expert in property law at Pinsent Masons, said: “It is important to understand the new rules and how they impact your property transaction.”

“Clearance certificates are free, valid for 12 months and can take up to 28 days to process. Without a certificate, 15% of the sale price will automatically be withheld by the purchaser and paid to the ATO,” she said.

“With this in mind, applying for a valid clearance certificate from the ATO early is a step in the right direction to avoid settlement delays and withholding.”

Angie Quan, of Pinsent Masons, said: "Failure to provide a clearance certificate will impose on the buyer the obligation to remit the required FRCGW amount to the ATO."