FRCGW

Significant changes have been introduced to foreign resident capital gains withholding  (“FRCGW”) rules from 1 January 2025 pursuant to the Treasury Laws Amendment (2024 Tax and Other Measures No. 1) Act 2024, creating new hurdles for mortgagees.

Previously, Australian resident property vendors were required to obtain a clearance certificate from the ATO and provide it to the purchaser at or before settlement. Failure to do so would result in the purchaser being required to withhold 12.5% of the purchase price and remit the amount directly to the ATO at settlement.

Importantly, the requirements only applied where the sale price of the property was $750,000.00 or more.

The changes

For all sale contracts entered into after 1 January 2025:

1. The 12.5% withholding percentage is increased to 15%; and
2. The price threshold of $750,000.00 is removed.

To avoid withholding, all Australian resident vendors must now obtain a clearance certificate regardless of the sale price or market value of the property being sold. The certificates are valid for 12 months, allowing conventional vendors to apply for the certificate early in the marketing and sale process.

Variation applications

However, vendors may apply for a variation of the withholding amount (potentially to 0%) where:

1. They are not entitled to a clearance certificate; and
2. The rate of 15% exceeds the vendor’s estimated tax liability.

A variation allows the applicant to request a specific withholding percentage lower than 15%. If a variation notice is provided by the ATO to the applicant, it must be provided to the purchaser at or before settlement. Importantly, mortgagees in possession can apply for a variation when exercising the power of sale.

The ATO provides acceptable reasons for reductions in the withholding amount including where:

1. There is no capital gain;
2. There are applicable tax losses for the registered owner;
3. A mortgagee’s secured debt would not be sufficiently paid if an amount was withheld; and
4. If the withholding would reduce a foreclosing creditor’s security.

For example, if a mortgage debt is guaranteed to remain unpaid regardless of whether withholding occurs, a mortgagee could apply for a variation to 0%.

Mortgages in possession are not entitled to apply for clearance certificates

Clearance certificates may only be obtained by parties with legal title to the relevant property. In practice, it is unlikely a debtor will apply for a clearance certificate to assist a mortgagee in possession.

Mortgagees in possession are not entitled to FRCGW clearance certificates and may only apply for a variation notice. However, simply exercising a power of sale is not listed by the ATO as a reason for reducing the withholding percentage when applying for a variation.

Additionally, the ATO has publicly stated that processing the application can take as long as 28 days. Given the expedient nature of sales by mortgagees in possession, this emphasises the importance of applying for such a variation early in the recovery process.

Exception for ADIs

An exception for mortgagees, who are also authorised deposit taking institutions, arises through a legislative instrument entitled: PAYG Withholding variation for foreign resident capital gains withholding payments – no residue after a mortgagee exercises a power of sale 2020.

The instrument allows ADI mortgagees to circumvent FRCGW in circumstances where:

1. a mortgagee is exercising a power of sale;
2. there are no residual proceeds after sales expenses and mortgage debts are paid; and
3. the mortgagee provides a written declaration to the purchaser that the withholding amount is nil.

The instrument remains in force and assists ADI mortgagees in certain ‘no residue’ sales where the proceeds will not satisfy the mortgage debt. There is no prescribed form for the written declaration provided by the mortgagee.

Crucially, the instrument adopts the definition of mortgagee from s 5 of the Banking Act 1959, meaning it can only be relied upon by ADIs, being conventional banks.

Non-bank lenders

Given the explosion in non-bank lending in Australia, which accounts for 5% of the financial system, it bears repeating that, as a mortgagee, a non-bank lender would not be entitled to a FRCGW clearance certificate nor be able to rely on the 2020 instrument.

The only course of action for non-bank lenders exercising their rights as a mortgagee in possession would be to apply for a variation notice, likely in situations where the sale proceeds will not be sufficient to cover the outstanding mortgage debt.

In practice, mortgagees in possession applying for a variation notice in a timely fashion is essential given the administrative delays in the ATO processing the application and issuing the notice prior to settlement. Its importance is also elevated given the application of the FRCGW regime to all Australian real estate contracts going forward.

This information is of general nature only and Omega Law invites you to contact us for specific advice tailored to your needs and circumstances.