From 1 January 2025, new rules affect how capital gains tax (CGT) withholding applies to real estate sales in Australia. Whether you are buying or selling property, it is important to understand these changes to ensure compliance and avoid unexpected financial implications.
Here’s what you need to know:
15% withholding tax on all real estate sales
From the start of 2025, a 15% withholding tax will apply to all Australian real estate sales, regardless of value. Previously, this applied only to sales above $750,000, but the threshold is now reduced to $0.
The obligation to withhold and pay this tax falls on the purchaser, but vendors/sellers need to act to ensure this doesn’t apply unnecessarily.
The role of clearance and variation certificates
To ensure you are not required to withhold:
- Australian Residents: Vendors who are Australian residents for tax purposes must apply for a Foreign Resident Capital Gains Withholding (FRCGW) Clearance Certificate through the ATO. This certificate confirms the seller’s residency status and tells the buyer they don’t need to withhold the 15%. Most applications are processed within 24 hours and certificates remain valid for 12 months. However, we recommend you allow a longer period as it may take longer.
- Non-Residents: Vendors who are foreign residents may apply for a Variation Certificate to reduce the withholding tax rate. A variation might be approved if the actual CGT liability is less than 15% or if a relevant double tax treaty applies. This process can take up to 28 days.
For non-residents, selling a main residence does not qualify for a variation unless the sale is triggered by specific life events, such as divorce, death, or serious illness.
Why the change?
The government has tightened the regime to improve compliance and integrity, especially for foreign residents. By increasing the withholding rate to 15% and removing the $750,000 threshold, it aims to ensure foreign vendors meet their tax obligations in Australia. These measures are also positioned as part of broader efforts to address housing affordability.
What property sales require clearance certificates?
According to the ATO, the following assets require a clearance certificate:
- Residential, commercial, or vacant land;
- Mining, quarrying, or prospecting rights;
- Leases over Australian property; and
- Indirect Australian real property interests (e.g., certain interests in entities holding Australian real estate).
Residency status for tax purposes
Determining whether you are an Australian resident for tax purposes is crucial. Residency status depends on factors such as:
- Time spent in Australia;
- Whether you live in Australia permanently; and
- Your intentions regarding future residency.
Non-individual entities (like companies and trusts) must also determine their tax residency status based on specific ATO tests.
How contracts reflect these changes
In Western Australia, the Joint Form of Conditions for the Sale of Land mandates that buyers deduct the withholding tax at settlement and remit it to the ATO unless the seller has provided the necessary documentation.
What does this mean for sellers and buyers?
If you’re selling property, especially if you’re a foreign resident, it’s vital to plan ahead and apply for the appropriate certificates well before settlement to avoid unnecessary delays or deductions. Purchasers must also ensure compliance by withholding the required tax if certificates are not provided.
Need help navigating these changes?
At Cullen Macleod, we understand that changes like these can feel overwhelming. Whether you’re buying or selling property, our experienced team can guide you through the process and ensure all requirements are met. Contact us today to discuss how we can help make your transaction seamless and stress-free.
