Understanding the Changes to Foreign Resident Withholding Tax in 2025
As of January 1, 2025, the Australian Taxation Office (ATO) has implementa change in the foreign resident withholding tax rate, increasing it from 12.5% to 15%. This adjustment impacts property sellers, making it crucial for Australian residents to understand the application process and requirements to avoid unnecessary withholding at settlement. Here’s a comprehensive guide to help you navigate this process.
What is the Foreign Resident Withholding Tax?
The foreign resident withholding tax is designed to ensure that foreign residents meet their tax obligations when selling taxable Australian property. When a property is sold, a portion of the sale price is withheld and remitted to the ATO if the seller does not qualify as an Australian resident for tax purposes.
With these changes, obtaining a clearance certificate is critical to avoiding the 15% withholding at settlement.
Who Needs a Clearance Certificate?
Australian residents selling property are required to obtain a clearance certificate from the ATO before settlement to confirm their residency status for tax purposes. Without this certificate, the buyer is legally obligated to withhold 15% of the property’s total sale price and remit it directly to the ATO.
If you are:
- An Australian resident for tax purposes: You must apply for a clearance certificate to ensure no withholding applies.
- A foreign resident: The 15% withholding will automatically apply unless you meet specific exemption criteria.
Application Process for Australian Residents
- Determine Eligibility
Before applying, ensure you meet the ATO’s definition of an Australian resident for tax purposes. This typically includes factors such as your primary residence, length of time spent in Australia, and ties to the country (e.g., family, employment, and property ownership). - Complete the Application Form
Visit the ATO’s online portal and fill out the clearance certificate application form. You will need the following information:
- Full name(s) of the property seller(s)
- Contact details
- Property address and details of the transaction
- Tax File Number (TFN) or Australian Business Number (ABN) (if applicable)
- Submission and Processing Time
The application can be submitted online, and processing typically takes up to 28 days. However, it is advisable to apply well in advance to avoid delays at settlement. - Receive Your Clearance Certificate
Once approved, the clearance certificate will be issued electronically. Provide a copy to your conveyancer, solicitor, or directly to the buyer’s representative to ensure the withholding is not applied.
What Happens if You Don’t Obtain a Clearance Certificate?
If you fail to obtain a clearance certificate before settlement, the buyer is legally required to withhold 15% of the property’s sale price and remit it to the ATO. You may be able to recover this amount when filing your tax return, but this process could delay access to the withheld funds.
Exemptions and Special Cases
Certain transactions may be exempt from the withholding requirements, including:
- Sales of properties valued under $750,000
- Certain types of commercial property transactions
Consult a tax professional to determine if your property sale qualifies for any exemptions.
What Buyers Need to Know
If you are purchasing property from a seller who does not provide a clearance certificate, you must withhold 15% of the total sale price and remit it to the ATO. Failure to comply with this requirement can result in penalties.
Key Takeaways for Sellers
- Apply for a clearance certificate well before settlement.
- Ensure all documentation is accurate and complete to avoid processing delays.
- Consult a tax advisor if you are unsure about your residency status or eligibility.
By being proactive and understanding the requirements, Australian residents can avoid unnecessary withholding and streamline their property transactions.
For further information, visit the ATO’s official website or speak to your conveyancer or tax professional.