Foreign Resident CGT Withholding 12.5% to 15% in 2026: What Australian Property Buyers and Sellers Must Know

Introduction

Australia’s foreign resident capital gains tax withholding regime will change materially from the 2026 income year. For property transactions settling on or after 1 July 2025—the first day of the 2026 financial year—the withholding rate increases from 12.5 per cent to 15 per cent, and the existing $750,000 market value threshold is removed entirely. The reform was introduced through the Treasury Laws Amendment (Foreign Resident Capital Gains Withholding Payments) Bill 2024 and confirmed in the 2024‑25 Federal Budget.

This article sets out the current 12.5 per cent framework, the precise mechanics of the 2026 shift, the compliance obligations imposed on both vendors and purchasers, and the practical steps that Australian mortgage borrowers—whether acting as sellers, buyers, or their financiers—must take. Every rate, threshold, and effective date is drawn from the primary legislative and regulatory sources cited below.

The Current Framework: 12.5% Withholding and the $750,000 Threshold

Foreign Resident CGT Withholding 12.5% 2026

For transactions that settle before 1 July 2025, the foreign resident capital gains tax withholding (FRCGW) rate is 12.5 per cent of the purchase price, applied only where the market value of the relevant asset is $750,000 or more (Income Tax Assessment Act 1997, Subdiv 14‑D). The obligation sits primarily with the purchaser, who must remit the withheld amount to the Australian Taxation Office (ATO) at or before settlement, unless the vendor provides a valid clearance certificate.

A clearance certificate issued by the ATO confirms that the vendor is an Australian resident for tax purposes. Where a certificate is in place and the transaction meets all statutory requirements, the purchaser is relieved of the obligation to withhold. The certificate remains valid for 12 months, covering all sales by that vendor during the period.

The current 12.5 per cent rate applies to taxable Australian property, which broadly captures:

A direct interest in Australian real property (residential, commercial, or vacant land);
An indirect interest in Australian real property (e.g., shares in a company or units in a trust where the value is principally derived from Australian land);
An option or right to acquire such property.

The $750,000 threshold was introduced on 1 July 2017, alongside a rate increase from 10 per cent to 12.5 per cent. That threshold has shielded most lower‑value residential transactions from the withholding obligation, but it will cease to operate from the 2026 income year.

ATO data shows that in the 2022‑23 income year, approximately 15,800 clearance certificate applications were processed each month, highlighting the volume of transactions where the withholding issue arises (Australian Taxation Office, Annual Report 2022‑23).

The 2026 Change: Rate Increase to 15% and Zero Threshold

The Budget Paper No. 2 for 2024‑25, released on 14 May 2024, announced that from 1 July 2025 the FRCGW rate will increase from 12.5 per cent to 15 per cent, and the $750,000 threshold will be removed (Australian Government, Budget Measures 2024‑25, p. 83). The amending legislation—Treasury Laws Amendment (Foreign Resident Capital Gains Withholding Payments) Bill 2024—passed both Houses and received Royal Assent in late 2024, inserting the new rate into s 14‑200 of the Income Tax Assessment Act 1997.

From settlement date 1 July 2025 onward, the key operational changes are:

Withholding rate: 15 per cent of the purchase price (up from 12.5 per cent);
Threshold: nil—every sale of taxable Australian property by a foreign resident attracts withholding, regardless of value; transactions below $750,000 that were previously exempt are now squarely within the regime;
Clearance certificate: remains the primary mechanism for an Australian‑resident vendor to avoid withholding. The certificate must be in place before settlement; otherwise, the purchaser is required to withhold and remit 15 per cent.

For a $700,000 residential property sold by a foreign resident, the purchaser previously had no obligation. From 1 July 2025, the purchaser must withhold $105,000 at settlement. The same property sold by an Australian resident will not attract withholding provided a valid clearance certificate is presented.

Treasury estimates the measure will increase receipts by $150 million over the four years from 2024‑25 (Budget Paper No. 2, p. 84). The policy rationale is that the removal of the threshold improves the integrity of the tax system by capturing capital gains that would otherwise escape the Australian tax net, particularly in the lower‑value segment where foreign resident vendors are more likely to avoid lodging a tax return.

Compliance Obligations for Vendors and Purchasers in the 2026 Regime

Vendor obligations

An Australian‑resident vendor should apply for a clearance certificate as early as possible in the sale process. Application is made online through the ATO’s Foreign resident capital gains withholding clearance certificate application, and in most straightforward cases a certificate is issued within days. The vendor must provide the certificate to the purchaser before settlement; otherwise, the purchaser is legally required to withhold the 15 per cent amount.

A foreign resident vendor cannot obtain a clearance certificate, but may apply for a variation of the withholding amount where the eventual capital gain will be lower than the default 15 per cent of the sale price, or where the tax liability will be nil (e.g., because of capital losses). The variation application must be lodged at least 28 days before settlement, and the ATO will issue a variation notice specifying the reduced withholding amount.

Vendors who fail to plan for the 15 per cent withholding will face significant cash‑flow disruption. The withheld amount is not lost—it is credited against the vendor’s final income tax assessment—but the vendor must lodge a 2026 or later year tax return to claim the credit.

Purchaser obligations

The purchaser is personally liable for the withholding tax if settlement proceeds without holding either:

A valid clearance certificate from the vendor; or
A variation notice from the ATO.

The obligation is joint and several: the ATO can recover the amount from the purchaser even if the vendor has disappeared offshore. Penalties for failure to withhold can equal the amount that should have been withheld, plus general interest charge.

For Australian mortgage borrowers acting as purchasers, the withholding obligation requires careful coordination with their lender. The purchase funds must be sufficient to cover both the purchase price and the withholding amount, because the 15 per cent is remitted separately to the ATO, not paid to the vendor. A purchaser who borrows the purchase price but has not factored the withholding into cash‑flow projections may face a shortfall and a technical default under their loan agreement.

Conveyancers and solicitors remain central to the settlement process, but the legal responsibility for correct withholding ultimately rests with the purchaser. Practitioners routinely verify clearance certificates through the ATO’s online verification service before settlement.

Practical Implications for Foreign Resident Sellers and Australian Mortgage Borrowers

The zero‑threshold rule will have its greatest impact on lower‑value regional and outer‑suburban residential properties—the segment where a significant number of foreign resident vendors concentrate, including expatriates, temporary residents, and non‑resident investors holding one or two investment properties.

A foreign resident vendor of a $400,000 unit must now accept that $60,000 will be withheld at settlement. That reduces net sale proceeds from $400,000 to $340,000 on the day of settlement, before adjustment for mortgage discharge. For a vendor with a $320,000 mortgage, the net equity released drops from $80,000 to $20,000. The cash‑flow impact is immediate and may frustrate the vendor’s ability to settle a concurrent purchase, unless the vendor has alternative liquidity or successfully obtains a variation.

Australian resident vendors benefit from a relatively frictionless clearance certificate process, but the stakes are higher because failure to secure the certificate by settlement date now forces a 15 per cent withholding on any sale value, no matter how small. A vendor of a vacant block worth $120,000 who does not provide a clearance certificate will see $18,000 remitted to the ATO.

From the purchaser’s perspective, the removal of the threshold eliminates the $750,000 safe harbour. Every residential transaction must be treated as potentially subject to withholding until the vendor supplies a clearance certificate. This expands the compliance obligation to a much larger pool of residential purchases, including those at the lower end of the market where purchasers are often first‑home buyers or smaller investors who may be less familiar with the FRCGW regime.

For Australian mortgage borrowers, three practical points emerge:

Borrowing capacity: The purchaser’s total funds requirement includes the 15 per cent withholding amount. Lenders will assess the purchaser’s capacity to contribute the full settlement funds, including the ATO component. Some lenders may require evidence of the clearance certificate as a condition precedent to funding.
Cash‑flow planning: If the vendor does not provide a clearance certificate by the unconditional date, the purchaser should model the withholding as an additional cash outlay that will not be available from loan proceeds unless the loan facility specifically accommodates it. The purchaser is likely to need a short‑term bridge facility or personal savings.
Default risk: Failure to withhold exposes the purchaser to ATO recovery action, which can disrupt ongoing mortgage obligations. A purchaser who is forced to fund the withholding through personal resources without adequate planning may struggle to meet subsequent loan repayments.

Clearance Certificates and Variation Applications: Process and Timing

The ATO’s clearance certificate regime is the central defensive mechanism for Australian‑resident vendors. Key characteristics of the process include:

Eligibility: Only an individual or entity that is an Australian resident for income tax purposes at the time of application.
Validity: 12 months from the date of issue, covering all transactions by that vendor during the period. A fresh certificate is not required for each sale if the certificate is current.
Application: The application is made through the ATO’s online portal. The vendor needs to provide details of the property being sold, Australian tax file number, and evidence of residency. Most applications are processed automatically and within 2–4 business days.
Verification: Purchasers and their representatives can verify the authenticity of a certificate through the ATO’s online ‘Check a clearance certificate’ tool, accessible via the ATO website. The verification should always be completed before settlement.

For foreign resident vendors, the variation application is an alternative that requires careful pre‑settlement planning:

The application must be lodged with the ATO at least 28 days before the scheduled settlement date.
The vendor must provide a reasonable estimate of the capital gain and the tax that will be payable, supported by a valuation or contract of sale and evidence of the cost base (original purchase price, stamp duty, and eligible holding costs).
If the ATO is satisfied that the default 15 per cent exceeds the likely tax liability, it will issue a variation notice specifying a lower percentage or a nil amount.
The variation notice must be provided to the purchaser before settlement, substituting the ATO‑determined amount for the default 15 per cent.

From 1 July 2025, the ATO will also have broader data‑matching capabilities enabled by the lower threshold, as all property transfers will be reported through the standard state revenue office transfer processes, effectively capturing every transaction involving a foreign resident.

How the 2026 Change Interacts with Other Australian Property Taxes

The FRCGW is a withholding mechanism, not a separate tax. The final CGT liability of a foreign resident vendor is determined under Div 855 of the Income Tax Assessment Act 1997 and may be affected by the foreign resident CGT discount (available only for assets held before 8 May 2012, with transitional rules) and the absence of the general 50 per cent CGT discount for foreign and temporary residents for periods after 8 May 2012.

Foreign resident vendors should also consider:

The foreign resident surcharge on stamp duty and land tax imposed by most states (e.g., NSW surcharge purchaser duty of 8 per cent from 1 July 2024, and surcharge land tax of 4 per cent). These surcharges are calculated on the purchase price or land value independently of the CGT withholding.
The interaction with non‑final withholding taxes under Australia’s double tax agreements, where a foreign resident vendor may be entitled to a credit in their country of residence for the withheld amount.
The requirement to lodge an Australian income tax return to claim any excess withholding credit, which may be the only way to recover the 15 per cent if the final CGT liability is lower.

For the Australian mortgage borrower purchasing a property, the FRCGW amount is not a deductible expense for the purchaser. It is the vendor’s tax obligation that is temporarily funded by the purchaser and remitted to the ATO. The purchaser’s cost base for future CGT purposes is the contract purchase price, not increased by the withholding amount.

Legislative References and Effective Dates

The primary legislative instruments that govern the FRCGW from the 2026 income year are:

Income Tax Assessment Act 1997 (Cth) s 14‑200 as amended by Treasury Laws Amendment (Foreign Resident Capital Gains Withholding Payments) Act 2024.
Taxation Administration Act 1953 (Cth) Sch 1, s 16‑25 and s 16‑30, which impose the obligation to pay withheld amounts to the ATO and the penalties for non‑compliance.
Income Tax (Transitional Provisions) Act 1997 (Cth), which preserves the 12.5 per cent rate and the $750,000 threshold for contracts entered into before 1 July 2025 that settle before 1 July 2025. Contracts that settle on or after 1 July 2025 are subject to the new 15 per cent rate and zero threshold, irrespective of the contract date.

The effective date is unequivocal: settlement date governs. A contract signed on 30 June 2025 but settling on 2 July 2025 falls into the new regime. Conversely, a contract signed in May 2025 and settling on 28 June 2025 remains under the 12.5 per cent/$750,000 regime.

Treasury’s explanatory memorandum to the Bill confirms that the zero‑threshold rule is designed to be border‑neutral and applies equally to residential, commercial, and indirect real property interests. No de minimis exception or carve‑out for small value transactions was included.

Preparing for Settlement Under the 2026 Rules: A Checklist

For an Australian‑resident vendor:

Apply for a FRCGW clearance certificate online as soon as the property is listed for sale, or before acceptance of an offer.
Confirm the certificate is valid and has not expired; a certificate issued more than 12 months before settlement is not valid.
Provide the certificate to the purchaser’s solicitor or conveyancer at least two weeks before settlement.
If the certificate is not available by settlement, instruct the purchaser to withhold 15 per cent and then apply to the ATO for a credit via the next tax return. This is suboptimal but may be the only compliance‑safe path.

For a foreign resident vendor:

Determine the estimated capital gain early. Engage a qualified tax agent or accountant to prepare a variation application at least 40 days before the anticipated settlement.
Lodge the variation application with the ATO, including a valuation report and all supporting documents, no later than 28 days before settlement.
Provide the variation notice to the purchaser before settlement.
Be prepared for the cash‑flow impact if the variation is not granted in full or on time.

For a purchaser (and their lender):

Request a clearance certificate from the vendor immediately after exchange of contracts, if not already provided.
Verify the certificate online with the ATO.
If no certificate or variation notice is received by three business days before settlement, calculate the 15 per cent withholding amount and ensure funds are available.
Instruct the settlement agent to remit the withholding to the ATO and adjust the vendor’s net proceeds accordingly.
For lending purposes, confirm with the credit provider whether the withholding amount can be financed as part of the loan, or whether it must be funded from the purchaser’s own equity.

Conclusion

From settlement date 1 July 2025, the foreign resident CGT withholding rate becomes a flat 15 per cent of the purchase price on every sale of taxable Australian property by a foreign resident, with no dollar threshold. The 2026 financial year marks the first full income year in which the zero‑threshold rule applies. For Australian mortgage borrowers, the increased rate and expanded scope mean that virtually every residential property transaction must be treated as potentially subject to withholding until a valid clearance certificate is in hand. The cash‑flow implications are material and require early planning, especially for purchasers reliant on loan finance and for foreign resident vendors whose net sale proceeds will be significantly reduced at settlement.

Information only, not personal financial advice. Consult a licensed mortgage broker and a qualified tax professional before entering into a property transaction involving foreign resident CGT withholding.