How the 15% withholding works, why clearance certificates now matter for every sale, and what buyers and sellers must do.
Foreign resident capital gains withholding, often shortened to FRCGW, is a system that helps the Australian Taxation Office collect capital gains tax from foreign residents who sell Australian property. The idea is simple: rather than chasing a seller who lives overseas after the sale, the law requires the buyer to hold back part of the purchase price and send it to the ATO. It is essentially a collection mechanism, designed to make sure the tax on a gain is secured at settlement rather than relying on a seller to pay it from another country later. Two important changes took effect from 1 January 2025, and they mean the rules now touch far more transactions than before, including many ordinary home and unit sales that would previously have fallen under the old value threshold.
According to the ATO's foreign resident capital gains withholding overview, the withholding rate increased to 15% from 1 January 2025. Just as significantly, the $750,000 property value threshold that used to apply was removed. Before the change, a rate of 12.5% applied only to property valued at $750,000 or more. Now the 15% rate applies to the value of all relevant property, no matter how modest the sale price.
| Feature | Up to 31 December 2024 | From 1 January 2025 |
|---|---|---|
| Withholding rate | 12.5% | 15% |
| Value threshold | $750,000 or more | No threshold (all property) |
| Who must withhold | The buyer | The buyer |
| How residents avoid it | Clearance certificate | Clearance certificate |
When a foreign resident sells certain Australian property, most commonly taxable Australian real property such as land and buildings, the buyer must withhold 15% of the purchase price and pay it to the ATO. The seller then receives the balance. This withholding is not a separate or extra tax. It is an advance payment against the seller's eventual capital gains tax liability, which is calculated in the normal way when they lodge an Australian tax return. If too much was withheld, the difference is refunded through that return.
Here is the part that catches Australian residents by surprise. The buyer does not know your tax residency, so the law assumes withholding applies unless you prove otherwise. The way you prove it is with a clearance certificate from the ATO. Because the $750,000 threshold has been removed, every Australian resident selling relevant property now needs a clearance certificate, even for a low-value sale. Without one, the buyer is required to withhold 15% of your sale price and send it to the ATO, and you would have to wait until you lodge your tax return to get it back.
Applying for a clearance certificate is free and is done through the ATO. The ATO recommends applying early, because the certificate must be valid and provided to the buyer on or before settlement. The ATO clearance certificate guidance sets out the process and how long a certificate stays valid.
A flat 15% of the sale price can be more than the actual tax a foreign resident owes, especially where the property has a high cost base or where capital losses apply. In those cases the seller can apply to the ATO for a variation. If the ATO agrees, it issues a variation notice setting a lower withholding amount, and the buyer withholds that reduced figure instead of the full 15%. Like a clearance certificate, the variation needs to be in place before settlement to be useful.
The legal obligation to withhold rests with the buyer, not the seller. If a buyer should have withheld but did not, the ATO can pursue the buyer for the amount, along with penalties and interest. This is why conveyancers and solicitors treat clearance certificates and variation notices as a standard part of the settlement checklist. If you are buying property and the seller has not provided a valid clearance certificate, the safe course is to withhold 15% and pay it to the ATO.
The withholding is aimed at what the tax law calls taxable Australian real property and a few related interests. In plain terms that covers residential and commercial land and buildings in Australia, a lease over Australian land where a premium was paid to obtain it, and mining, quarrying or prospecting rights in Australia. It can also reach indirect interests, broadly where someone holds a large stake in an entity whose value comes mainly from Australian real property, and options or rights to acquire any of those things. For the great majority of everyday transactions, though, the asset in question is simply a house, a unit or a block of land. The ATO's overview sets out the full list and the technical definitions.
Suppose a foreign resident sells an investment unit in Australia for $600,000 and does not obtain a variation. The buyer is required to withhold 15% of the price, which is $90,000, and pay that amount to the ATO at settlement. The seller receives the remaining $510,000. When the seller later lodges an Australian tax return, their actual capital gains tax is calculated in the normal way, taking the cost base and any losses into account. The $90,000 already withheld is credited against that final liability. If the real tax owed turns out to be less than $90,000, the difference is refunded. This is exactly the situation a variation is designed to avoid, because it lets the seller reduce the upfront withholding when the flat 15% would clearly overstate the tax due.
Disclaimer: This article is general information, not tax or financial advice. Rules and rates can change. Always confirm the current position with the ATO and seek advice for your own circumstances.