Non-residents who sell or lease real estate in Australia must retain 15% of the sale price or lease premium and remit it to the Australian Taxation Office (ATO) by January 1, 2025. This requirement is part of the Foreign Resident Capital Gains Withholding Scheme (FRCGW Scheme), which went into effect in July 2016. 

 

What changes have been made to the FRCGW scheme?

 

The FRCGW Scheme is found in subsection 14D of Schedule 1 of the Taxation Administration Act 1953 (Cth). Act No. 135, 2024, Treasury Laws Amendment (2024 Tax and Other Measures No. 1), issued in the Australian Official Gazette on December 12, 2024 (Act), amended the FRCGW Scheme.

 

The Act changes the FRCGW Scheme in two important ways:

 

• The percentage of the sale price or lease premium that must be withheld and reported to the ATO has increased from 12.5% to 15%.
• The property value threshold of $750,000 has been removed.

 

Regardless of the property’s value, non-residents who sell or lease real estate in Australia must pay the ATO 15% of the sale price or lease premium.

 

Who qualifies as a non-resident for tax purposes in Australia?

 

A non-resident is defined as someone who does not meet any of the four legislative requirements for Australian taxation. On June 7, 2023, the ATO issued Taxation Ruling 2023/1, “Income tax: residency tests for individuals” (Ruling). 

 

The opinion specifies the specific residency requirements for individuals provided in paragraph 6(1) of the Income Tax Assessment Act 1936 (Cth), as well as how the Commissioner of Taxation will apply them.

 

• The test of “ordinary concepts”
• The test of “domicile”; and
• The “183-day” test.

 

The “Commonwealth superannuation test” is not discussed in depth in the ruling. According to Item 5 of the ATO’s Ruling Compendium to the Ruling (TR 2023/1EC), the Commonwealth superannuation test is typically only applicable to a small number of funds and is not a “commonly arising issue.”

 

Non-residents are often defined as those who:

 

• don’t often reside in Australia (test of usual concepts);
• are not Australian residents, or if they reside in another country (domicile test).

 

According to the 183-day test, a person is deemed an Australian tax resident if they spend 183 days in Australia within a fiscal year, unless they normally live outside of Australia and have no plans to relocate there. The ATO defines ‘usual place of abode’ as the location where they would normally live if they were not away. Their habitual place of residence does not have to be outside of Australia in order to maintain an overseas residence.

 

The 183-day rule is commonly misconstrued to suggest that a person is considered a non-resident if they are absent from Australia for 183 days per year. They can become tax residents by meeting any of four requirements, but the 183-day test is only one of them. In general, Australian residents returning to Australia can pass the domicile or ordinary ideas tests without reaching the 183-day threshold. If a person arrives in Australia and is not physically present for 183 days of the fiscal year, including arrival and departure, they are considered a non-resident. The 183 days do not have to be consecutive.

 

Each case must be thoroughly studied and judged in light of its specific facts and circumstances. There is no single element that the ATO considers to be critical, and the relevance of certain facts and circumstances will vary from case to case: Decision, paragraph four. Seeking assistance is critical since incorrect residence decisions can have serious tax consequences, including interest and penalties for foreign nationals.

 

Dispelling misconceptions regarding individual tax residency in Australia

 

Australian expatriates have expressed serious concerns about the changes to the standards used to determine residence for those under the:

 

• The principal test is the 183-day “bright line” test.
• The “Commencing Residency Test” and “Ceasing Residency Test” are secondary tests.

 

According to the primary test, an Australian expat who stays in Australia for more than 183 days is considered an Australian tax resident. Those who have spent more than 45 days but less than 183 days in Australia within a fiscal year are subject to supplementary tests.

 

Australian expatriates are concerned that if they remain in Australia for longer than 45 days, they will be considered Australian tax residents and may be subject to taxes on their overseas earnings. This misunderstanding concerns the plans proposed by the former Coalition Government in the Federal Budget for 2021-2022, which were based on the Board of Taxation’s tax residency recommendations in their 2019 report. The Albanese government has not moved to change the residence regulations for individuals. The Federal Budget reforms for 2021-2022 are not legally binding.

 

The public has overwhelmingly asked the federal government to take into consideration:

 

• To conform to other nations, the 45-day limit will be extended to 90 days.
• providing added anxiety due of travel for employment, family disease, or a global epidemic.
• excluding children of Australian nationals enrolling in Australian boarding schools.

 

Since the verdict, no draft legislation implementing the Board of Taxation’s suggested modifications has been made available. Since the 2025 election is scheduled for May, it is unlikely that the Federal Government will introduce any legislation until the fiscal year 2026. Given the public’s concerns, it is hoped that the federal government will make changes to the way residency is decided for individuals.

 

Do Australians see an impact on the FRCGW scheme?

 

To avoid being affected by the FRCGW Scheme, Australians who are selling or leasing real estate in Australia must move swiftly. To demonstrate that they are not non-residents and are not covered by the FRCGW Scheme, they must obtain a clearing certificate from the ATO before closing on the sale of their property or signing a premium lease. 

 

This certificate must be attached to the lease by the lessor or provided to the buyer at or before settlement. If the selling money or lease premium is not delivered on time, the buyer or lessee must deduct 15% and pay it to the ATO. After receiving the clearance certificate, Australian individuals would need to apply for a refund of the withheld amount.

 

Obtaining a clearing certificate fast is critical for anyone selling real estate in Australia. These certificates are valid for one year and are free. 

Next steps

 

Anyone considering buying or selling real estate in Australia should seek advice on how the FRCGW Scheme may affect them, as well as the protocols that must be followed during the sales process. To avoid tax penalties, Australian expats and non-residents should take particular care while buying and selling real estate in Australia.

 

The Bates Cosgrave team can assist you with the  applications for FIRB permission, foreign surcharge exemptions, or voluntary disclosures with Revenue NSW. We can also provide advice on the tax implications of the FRCGW Scheme.