Expats and Non-Residents Beware: Changes to Australian Foreign Resident Capital Gains Tax (CGT) Withholding Regime

A version of this article was published in the Thomson Reuters’ Weekly Tax Bulletin on 17 January 2025.

Since 1 January 2025, non-residents who sell or lease property in Australia must withhold 15% of the sale price or lease premium and remit the amount to the Australian Taxation Office (ATO). This requirement is part of the foreign resident capital gains withholding scheme (FRCGW Scheme) which was originally introduced in July 2016. For more information, please see our previous article here.  

What are the changes to the FRCGW Scheme?

The FRCGW Scheme exists in subdivision 14D of Schedule 1 to the Taxation Administration Act 1953 (Cth). Changes to the FRCGW Scheme were enacted under Act No 135, 2024, Treasury Laws Amendment (2024 Tax and Other Measures No. 1) published in the Australian Official Gazette on December 12, 2024 (Act).

There are two key changes to the FRCGW Scheme under the Act: 

• The withholding amount from the sale price or lease premium to be remitted to the ATO has increased from 12.5% to 15%.

• The $750,000 threshold for property values has been removed. 

Non-residents must remit 15% of the sale price or lease premium to the ATO when selling or leasing property in Australia, regardless of the property's value.

Who is a non-resident for Australian tax purposes?

A non-resident for Australian tax purposes is an individual who does not meet any of the 4 statutory tests. The ATO released Taxation Ruling 2023/1 ‘Income tax: residency tests for individuals’ on 7 June 2023 (Ruling). The Ruling explains how the Commissioner of Taxation will apply the residency tests for individuals contained in subsection 6(1) of the Income Tax Assessment Act 1936 (Cth), specifically:

• the 'ordinary concepts’ test; 

• the ‘domicile’ test; and

• the ‘183-day’ test.

The Ruling does not extensively cover the ‘Commonwealth superannuation test’. In the ATO’s Ruling Compendium to the Ruling (TR 2023/1EC), the ATO states that the Commonwealth superannuation test typically only applies to a limited number of funds and is therefore not a ‘commonly arising issue’: Item 5 in TR 2023/1EC.

 Generally, individuals are considered a non-resident if they:

• do not ordinarily live in Australia (ordinary concepts test); or

• do not have a permanent home in Australia, or if they have a permanent home outside of Australia (domicile test).

Under the 183-day test, if individuals are in Australia for 183 days in a financial year, they will be classified as an Australian tax resident unless their usual place of abode is outside of Australia and they do not intend to live in Australia. The ATO defines 'usual place of abode' as the place they would normally live if not absent. It is not necessary to maintain a dwelling overseas for their usual place of abode to be outside Australia.

A common misconception about the 183-day rule is that if individuals are not in Australia for 183 days in a year, they will be considered a non-resident. However, the 183-day test is only one of the 4 tests, and satisfying any one of them can make them a tax resident. Generally, Australian citizens resuming residency in Australia can meet either the ordinary concepts test or domicile test without satisfying the 183-day test. For individuals arriving in Australia, they will be a non-resident if they are not physically present in Australia for 183 days in a financial year, including arrival and departure. The 183 days do not need to be continuous. 

Each case must be carefully examined and assessed based on its individual facts and circumstances. The significance of specific facts and circumstances will vary from case to case and there is no single factor that the ATO considers to be paramount: Ruling paragraph 4. It is important that advice is sought, as incorrect residency conclusions can result in adverse tax implications, including penalties and interest for expats.

Myth busting changes to Australian tax residency for individuals

Australian expats have raised significant concerns about the changes to determining residency for individuals under the:

·         Primary test – the ‘bright line’ 183-day test;

·         Secondary tests - the ‘Commencing Residency Test’ and the ‘Ceasing Residency Test’.

The primary test provides that if an Australian expat spends more than 183 days in Australia, they will be considered an Australian tax resident. The secondary tests apply to individuals who have been in Australia for more than 45 days but less than 183 days in a financial year.

Australian expats are concerned that staying in Australia for over 45 days will make them Australian tax residents, leading to potential taxation on their worldwide income. This misconception relates to the proposals announced by the previous Coalition Government in the 2021-22 Federal Budget based on the Board of Taxation's tax residency recommendations from their 2019 report. The Albanese Government have not progressed the changes to the residency rules for individuals. The reforms announced in the 2021-22 Federal Budget are not law.

Overwhelming, the public have requested the Federal Government to consider:

• amending the 45-day rule to 90 days to align with other countries

• granting special considerations due to travel for family illness, work related travel or global pandemic

• excluding Australian citizen's children who attend boarding school in Australia

Since the Ruling, draft legislation to implement the reforms proposed by the Board of Taxation has yet to be released. It is unlikely that the Federal Government will introduce any legislation prior to the 2026 financial year with the 2025 election scheduled in May. It is hoped that the Federal Government brings in the reforms to determining residency for individuals taking into account the concerns raised by the public.

How does the FRCGW Scheme work?

The FRCGW Scheme applies to non-residents who sell real property that they own in Australia. It also applies to non-residents who grant a lease over real property that they own in Australia, where a lease premium is paid.

The FRCGW Scheme requires non-residents to withhold 15% of the value of the property they are selling or the amount of the lease premium for their leased property, and remit this amount to the ATO.

The changes to the FRCGW Scheme apply to transactions from 1 January 2025 onwards. For contracts or leases entered before this date, non-residents will still be subject to a 12.5% withholding rate, provided the property is valued at $750,000 or more.

Does the FRCGW Scheme affect Australian residents?

Australian residents selling their real property or granting leases over their property in Australia must take early action to avoid being affected by the FRCGW Scheme. They must apply for a clearance certificate from the ATO before settling their property sale or entering into a premium lease to prove they are not non-residents and not subject to the FRCGW Scheme. This certificate must be provided to the purchaser at or before settlement, or attached to the lease by the lessor. If not provided in time, the purchaser or lessee must withhold 15% of the sale price or lease premium and pay it to the ATO. Australian residents would then need to apply for a refund of the withheld amount once they obtain the clearance certificate.

It is crucial for individuals selling Australian property to obtain a clearance certificate in a timely manner. These certificates are free and valid for 12 months. Advisers should apply for the certificate as soon as the decision to sell is made. For assistance with clearance certificates including urgent applications, please contact the writers.

Next steps

For those considering buying or selling a property in Australia, advice should be sought as to how the FRCGW Scheme may affect you and the steps that need to be taken throughout the sale process. Australian expats and non-residents should take steps prior to buying and selling Australian property to limit any tax stings. 

The team at Bartier Perry can assist in providing advice on the tax implications of the FRCGW Scheme and guiding you through the buying or selling process, including applications for FIRB approval and applications for foreign surcharge exemptions or voluntary disclosures with Revenue NSW.

Should you have any questions or require any assistance, please contact the writers.

Authors: Lisa To & Emma Swanson