Changes to foreign resident capital gains withholding tax rate and threshold - exposure draft legislation released for consultation

The withholding tax rate for the capital gains tax regime for non-residents is proposed to increase from 12.5 per cent to 15 per cent and the $750,000 property value threshold is proposed to be removed i.e. reduced to nil.

This proposed change was announced as part of the Federal Government’s 2023-24 Mid-Year Economic Forecast (MYEFO) in relation to changes to the capital gains tax regime for foreign residents. Treasury has released exposure draft legislation in relation to changes to the rates and thresholds in relation to Foreign Resident Capital Gains Withholding (FRCGW) and is asking for any comments by 5 August 2024.

What you need to know

What are the measures?

The FRCGW regime first came into effect on 1 July 2016 with a view to improving collection of capital gains tax liabilities owed by foreign residents and improving compliance of non-residents with their Australian tax obligations.

The regime currently applies to require a purchaser to withhold 12.5 per cent of the proceeds from a transaction where a non-resident vendor disposes of an asset that is taxable Australia property for $750,000 or more. Taxable Australian property broadly includes the following:

• Taxable Australian Real Property (TARP) or
• an indirect Australian real property interest (IARPI) or
• an option or right to acquire such property or such an interest.

The Exposure Draft legislation introduces measures previously announced by the Federal Government as part of its 2023-24 MYEFO to:

• increase in the FRCGW rate for relevant CGT assets from 12.5 per cent to 15 per cent and
• remove the current $750,000 threshold before which withholding applies for transactions involving taxable Australian real property or an indirect Australian real property interest that causes a company title interest to arise.

These changes do not affect the exemption from FRCGW where a vendor obtain a clearance certificate from the Commissioner of Taxation that they are not a foreign resident or make a residency declaration or a declaration that the asset is a not an indirect Australian real property interest.

What is the expected impact of the proposed changes?

The explanatory statement to the proposed changes notes that the government’s reasoning in increasing the FRCGW rate from 12.5 per cent to 15 per cent is that the current rate is not sufficient to recover capital gains owed by foreign residents on capital gains in many instances, especially given increases in property prices in recent years.

Removal of the $750,000 threshold will require a purchaser to withhold 15 per cent tax in relation to all transactions involving the disposal of TARP or IARPI unless the vendors provide an ATO clearance certificate or make a declaration confirming that they are not a foreign resident or, for indirect interests in TAP, a declaration that the indirect interests are not IARPI in respect of the transaction.

When are the proposed changes applicable?

The proposed changes, if enacted, will apply to CGT events occurring from the later of 1 January 2025 and the commencement date of the amending Bill.

Reach out to your local BDO adviser from our tax services team if you would like further information regarding these measures.