Selling Australian property as a non-resident carries significant CGT consequences. What foreign residents and departing Australians need to know first.
The capital gains tax (CGT) consequences of selling Australian property can be very different depending on whether the seller is an Australian tax resident or a foreign resident at the time of the sale. Many Australians who have moved overseas, and many foreign nationals who have invested in Australian property, are caught by CGT rules that they did not anticipate.
If you are selling Australian property while living overseas, or if you have recently returned to Australia after a period abroad, this article is essential reading.
Foreign residents are subject to Australian CGT on assets that are classified as taxable Australian property. The most common form of taxable Australian property is real property situated in Australia, residential and commercial.
Foreign residents are taxed on capital gains from Australian property at the applicable marginal rate. There is no 50% CGT discount for gains on assets held for more than 12 months. This is a significant distinction from the position of Australian residents, who are entitled to the 50% discount.
The removal of the 50% CGT discount for foreign residents means that the effective CGT burden on a given gain can be double what an Australian resident would pay on the same gain. For a large capital gain, this difference can represent a very substantial amount of money.
Prior to 2017, foreign residents could claim the main residence CGT exemption on the sale of a property that had previously been their primary home in Australia. This meant that a person who had lived in their Sydney home for many years, then moved overseas, could sell the property and claim a full or partial main residence exemption.
Changes to the law, effective from 9 May 2017 with a transitional period that ended in 2020, removed the ability of foreign residents to access the main residence exemption on the sale of Australian property. A foreign resident who sells their former Australian home now has no access to this exemption.
The impact of this change has been particularly severe for long-term Australian residents who moved overseas and owned property that had appreciated significantly in value. Where previously the sale might have attracted no CGT at all, it may now attract a very large CGT liability.
When a foreign resident vendor sells Australian real property, the purchaser is required by law to withhold a portion of the purchase price and remit it to the ATO. From 1 January 2025 this regime changed significantly: the withholding rate rose from 12.5% to 15%, and the previous $750,000 threshold was removed altogether. The withholding now applies to every disposal of Australian real property by a foreign resident, regardless of the property’s value. (For contracts entered into before 1 January 2025, the former rules, 12.5% on property of $750,000 or more, continue to apply.) The obligation arises regardless of whether the vendor ultimately has any Australian tax liability.
Because the threshold has been removed, the clearance certificate process now matters on every property sale, not just high-value ones. An Australian-resident vendor must obtain a clearance certificate from the ATO and give it to the purchaser before settlement; without it, the purchaser must withhold 15% of the price and pay it to the ATO, even where the vendor is plainly an Australian resident with no foreign-resident status at all. Where a property is owned by more than one person, each owner must apply for their own certificate.
Clearance certificates are obtained through the ATO’s online system and are valid for 12 months. While many are issued quickly, processing can take longer where the ATO needs to check the vendor’s record, so vendors should apply well in advance of listing or settlement. Failing to obtain one when required can cause significant delays, withheld funds, and complications at settlement, money that can take considerable time to recover through the vendor’s next tax return.
Your CGT position on a property sale is determined by your tax residency at the time of the sale, not at the time you purchased the property or at any other time. This means that the timing of a decision to sell can have a very significant impact on the tax outcome.
A person who sells their property while temporarily overseas may be a non-resident for tax purposes even if they have lived in Australia for most of their life. Conversely, a person who returns to Australia and re-establishes residency before selling may be entitled to the 50% CGT discount they would otherwise have lost.
Residency determination in these circumstances can be complex, and the consequences of getting it wrong are severe. Professional advice before entering into a sale contract is essential.
Australian Tax Experts has extensive experience in CGT matters involving non-residents and departing Australians. In one case, our office successfully objected to an ATO private ruling that had determined our client was a foreign resident at the time she sold her Sydney home, a determination that would have cost her more than $350,000 in capital gains tax.
By applying the domicile test under Australian tax law, we were able to demonstrate that our client remained an Australian tax resident despite having lived in the UK for more than three years. The ATO accepted our argument and the CGT liability was reduced to nil.
If you are selling Australian property and have any uncertainty about your residency status or CGT position, contact us before you sign the contract.
Related guides: The 6-Year CGT Main Residence Exemption Rule Explained; Foreign resident capital gains tax withholding regime.
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