Long gone are the days where a taxpayer could enter into a property transaction without the need to jump through hoops or complete additional compliance tasks imposed by the Government. Unfortunately, this looks set to continue.

In December 2023, the Federal Government released its Mid-Year Economic and Fiscal Outlook Report, which included proposed changes to the Foreign Resident Capital Gains Withholding regime (FRCGW). These included an increase in the FRCGW tax rate from 12.5 percent to 15 percent and a reduction in the withholding threshold from $750,000 to $0 for contracts entered into from 1 January 2025.

Under the current regime, purchasers of Australian real property from foreign resident vendors are required to withhold 12.5 percent of the property purchase price and pay it to the ATO, where the market value of the property is $750,000 or more.

The regime is intended to ensure the ATO can collect foreign residents’ Australian tax liabilities upfront in order to address the issue of some foreign residents not reporting their CGT liabilities when selling Australian real property.

The regime could also apply to purchasers from Australian resident vendors if they did not provide the buyer with a clearance certificate issued by the ATO. This certificate confirms the seller of the property is an Australian resident and therefore FRCGW does not apply to the transaction.

By increasing the withholding rate from 12.5 percent to 15 percent, a greater proportion of the purchase price will be paid to the ATO instead of to the foreign resident vendor. The measure is estimated to increase Government’s receipts by $150.5 million and increase payments by $5.9 million over the five years from 2022-23.

The other change is one that will impact more Australian residents dealing in property transactions, as it reduces the withholding threshold from $750,000 to $0. This will mean that all sales of Australian real property by Australian resident vendors will require ATO clearance certificates to be completed, regardless of the market value of the property.

Should the above changes become law, this will be another measure vendors (and their agents/advisers) will need to consider to avoid significant financial consequences.

This article first appeared in the Winter 2024 issue of HLB Mann Judd Perth’s Client Alert.