Capital Gains Tax (“CGT”) and the Foreign Resident Capital Gains Withholding (“FRCGW”) Tax

What is Capital Gains Tax (“CGT”)?

When you sell a property, you may make a capital gain to the extent that the capital proceeds you receive are more than the cost base of the property.

The capital gain is the difference between what it cost you to purchase and hold the property, and what you got when you sold it.

Capital Gains Tax (“CGT”) is payable on the capital gain.

Exemptions

Your ‘main residence’ (your home) is generally exempt from CGT unless you were not a resident of Australia for tax purposes while you were living in the property. If you are a foreign resident for tax purposes at the time the sale contract is entered into, you may no longer be entitled to claim the main residence exemption. In the 2017-18 Budget, the government announced that foreign tax residents will no longer be entitled to claim the main residence exemption when they sell property acquired by them on or after 9 May 2017 in Australia.

The change means that, only Australian residents for tax purposes at the time of the disposal (contract date), can access the exemption. Please note that the Australian Taxation Office (“ATO”) generally deems overseas students enrolled in a course that is more than six months long at an Australian institution, Australian residents for tax purposes.

Despite the name, Foreign Resident Capital Gains Withholding (“FRCGW”) applies to ALL Vendors disposing of Australian property where the contract price is $750,000 and above.

Clearance Certificate

In those circumstances, the Purchaser is required to withhold 12.5% of the purchase price from the sale proceeds as FRCGW tax, and pay it to the ATO, unless the Vendor can provide proof that they were not a foreign resident for tax purposes at the time the transaction was entered into. This is achieved by applying for the Clearance Certificate online from the ATO. This must be initiated early enough so that settlement can take place on time, as the ATO can take up to 28 days to issue a Clearance Certificate. Clearance Certificates are normally valid for 12 months, and can be used by the same Vendor for the sale of multiple properties while valid.

Substantial penalties apply in circumstances where a Purchaser does not withhold and remit the relevant amount from the purchase price if they do not receive a valid Clearance Certificate.

The total CGT payable will be calculated when you submit your next tax return, and any difference between the total CGT payable and that withheld as FRCGW, will be payable (or refundable) at that time.

We invite you to contact us if you require further information and/or assistance with identifying and managing your obligations in relation to CGT and FRCGW.

 

Disclaimer: The information contained in this briefing is general in nature, not intended to be definitive, and does not take into account specific circumstances.

It is recommended that you seek appropriate legal advice as to the application of the taxes discussed in this briefing to your specific circumstances.