Foreign Resident CGT Withholding 2026: 12.5% Rate, $750k Threshold, and the July 2025 Overhaul

Introduction

Foreign resident capital gains tax (CGT) withholding in Australia operates as a prepayment mechanism on sales of taxable Australian property. Under rules that apply to settlements on or after 1 July 2017, a purchaser must withhold 12.5% of the sale price where the vendor is a foreign resident for tax purposes and the property’s market value reaches $750,000. The withheld amount is remitted to the Australian Taxation Office (ATO) and credited against the vendor’s final CGT liability.

From 1 July 2025—the start of the 2026 income year—the withholding rate increases to 15% and the $750,000 threshold is abolished. The change was confirmed in the 2024–25 Federal Budget as part of a package to improve compliance and align the foreign resident CGT regime with broader tax integrity measures. Mortgage borrowers who are foreign residents selling Australian property, and domestic purchasers who acquire property from a foreign vendor, will feel the impact immediately.

This article unpacks the current 12.5% regime, the roadmap to the 2026 rules, and the practical steps that lenders, borrowers, and conveyancers should take to manage withholding obligations.

How the 12.5% Foreign Resident CGT Withholding Works

The foreign resident CGT withholding regime is found in Subdivision 14‑D of Schedule 1 to the Taxation Administration Act 1953. It requires the purchaser of certain taxable Australian property to withhold an amount from the purchase price and pay it to the ATO when the vendor is a relevant foreign resident. For residential property, the relevant withholding rate is 12.5% of the contract price, or of the market value if the parties are not dealing at arm’s length.

The obligation falls on the purchaser, not the vendor. If the purchaser fails to withhold, the ATO may recover the amount from the purchaser as a penalty, together with general interest charge accruing from the date of settlement.

The 12.5% rate has applied since 1 July 2017, when it was increased from the original 10% introduced on 1 July 2016. The rate is set in section 14‑210 of Schedule 1, and the ATO publishes administrative guidance here.

For mortgage borrowers, the withholding creates a cash flow event. A foreign resident vendor with an outstanding home loan typically expects to discharge the mortgage from sale proceeds at settlement. If 12.5% is withheld before the mortgage is repaid, the net proceeds will fall short of expectations. Lenders will factor the withholding into their settlement calculations, and a shortfall may require the borrower to inject additional funds at settlement to clear the debt.

The $750,000 Market Value Threshold and Its Effect

Up to 30 June 2025, a purchaser is only required to withhold if the market value of the CGT asset is $750,000 or more. This threshold is specified in regulation 44‑28 of the Taxation Administration Regulations 2017. Market value is measured at the time the contract is entered into, not at settlement. The threshold applies per asset, meaning that a sale of multiple items under a single contract may be aggregated if they form a single CGT asset, but separate contracts are assessed individually.

The $750,000 threshold has insulated many lower-value property transactions from withholding. For instance, a unit or house sold for $700,000 by a foreign resident vendor triggers no withholding obligation for the purchaser under the current rules. The ATO’s data indicates that approximately 20% of residential transactions by foreign residents have fallen below the threshold, according to submissions to the Board of Taxation review of the foreign resident CGT withholding regime.

From a lending perspective, the threshold has meant that mortgagees holding security over lower-value properties were less likely to face a disrupted settlement waterfall. Once the threshold is removed in 2025, every property sale by a foreign resident—regardless of price—will attract withholding, which will affect the net sale proceeds and, in turn, the borrower’s capacity to discharge the loan.

Clearance Certificates and Variation Applications

A vendor who is an Australian resident for tax purposes can avoid withholding by providing the purchaser with a clearance certificate issued by the ATO. The certificate confirms that the vendor is not a foreign resident and that the purchaser is not required to withhold. The clearance certificate must be valid at the time of settlement, and the vendor must apply for it early enough to receive it before the settlement date; the ATO’s published target is to issue certificates within 14 days for residential property where the application is complete.

For foreign resident vendors, a clearance certificate is not available. Instead they may apply for a variation of the withholding amount where the standard 12.5% withholding is inappropriate—for example, where the vendor expects a capital loss, or where the property is held in a fixed trust and the beneficiary is an Australian resident. The variation application is made to the ATO using the form Foreign resident capital gains withholding variation (NAT 74550). If granted, the variation notice sets a reduced withholding amount, often nil or a small sum.

The ATO processes approximately 6,000 variation applications each year. Processing times can be lengthy. In 2022–23 the median time was 28 days, according to the ATO’s annual report. This creates a practical risk for settlements: if the variation notice has not arrived by settlement day, the purchaser must withhold the full 12.5%. Mortgage borrowers should therefore lodge a variation application as soon as a contract is exchanged and before the finance and settlement deadlines start to compress.

For an Australian purchaser acquiring from a foreign resident, the presence or absence of a variation notice changes the funds flow. Without one, the purchaser remits 12.5% to the ATO and pays the balance to the vendor (and then the vendor discharges the mortgage). With a successful variation, the vendor receives a higher net amount, making it easier to clear the existing loan. Purchasers and their financiers should verify whether a variation notice has been obtained and, if not, factor the full 12.5% withholding into the funds required at settlement.

The 2026 Overhaul: 15% Rate and Removal of the Threshold

On 14 May 2024, the Government announced in the 2024–25 Budget that the foreign resident CGT withholding rate would increase from 12.5% to 15%, and the $750,000 market value threshold would be removed, effective for acquisitions of taxable Australian property made on or after 1 July 2025 (Treasury fact sheet, p2024-569085). The change was enacted via Treasury Laws Amendment (Foreign Resident Capital Gains Withholding Payments) Regulations 2024, which amended the relevant regulations and increased the rate in line with the Government’s determination.

From 1 July 2025:

• Withholding rate = 15% of the purchase price.
• No market value threshold: every disposal by a foreign resident is caught, including sales of property under $750,000.
• The obligation to withhold applies to all types of taxable Australian property—residential, commercial, vacant land, and indirect interests such as majority interests in land-rich companies.

The effect will be felt acutely in the 2026 income year. A foreign resident vendor selling a property for $500,000 will face a $75,000 withholding (15%), compared with zero under the pre‑1 July 2025 rules. For a $1 million property, the withholding rises from $125,000 (12.5%) to $150,000 (15%). The Board of Taxation’s report, referenced in the Budget papers, estimated that the removal of the threshold will bring an additional 15,000 transactions per year into the withholding net, generating an estimated $150 million in ATO collections over the forward estimates.

Implications for Mortgage Borrowers and Lenders

The changes will require mortgage borrowers who are foreign residents to plan for a larger deduction at settlement. A vendor with a $300,000 outstanding mortgage on a property sold for $900,000 currently expects net proceeds of approximately $832,500 after agent fees and the 12.5% withholding ($112,500). Under the new rules, withholding increases to $135,000 (15%), reducing net proceeds to roughly $802,500. That $30,000 difference can be enough to trigger a shortfall if the borrower has not arranged bridging finance or does not hold sufficient cash reserves.

Lenders will need to adjust their settlement instructions. For most mortgages, the bank’s payout figure is calculated on the assumption that the full sale price (less agreed deductions) will be available. The ATO’s Form 1 (notice of variation) or evidence of a clearance certificate must be provided to the lender’s settlement agent. If the full 15% withholding applies, the shortfall must be covered by an alternative source of funds, or the borrower may be required to reduce the sale price to close. In practice, lenders are likely to demand evidence of the variation or extra cash at an earlier stage.

Domestic borrowers who purchase property from a foreign vendor also bear indirect risks. A purchaser must ensure they have sufficient funds to pay the withholding to the ATO on settlement day. The purchaser’s own mortgage lender will scrutinise the funds flow: the loan drawdown and purchaser’s contribution must cover the full purchase price, plus the withholding amount unless a clearance certificate is supplied. In a rising-rate environment, a purchaser who miscalculates can easily face a shortfall.

Compliance and Penalties

The ATO’s approach to compliance is data‑driven. All withholding amounts are reported through the ATO’s online services for agents or via the paper Foreign resident capital gains withholding purchaser payment notification (NAT 74927). The ATO cross‑references the notification with property transfer records from state revenue offices and the FIRB register where applicable.

Penalties for the purchaser who fails to withhold or under‑withholds are set out in Division 284 of Schedule 1. The base penalty is the amount the purchaser failed to remit, and it can be reduced under the usual penalty remission guidelines if the failure is due to a reasonable mistake. In addition, the general interest charge accrues from the date the withholding was due, at the rate determined under section 8AAD of the Taxation Administration Act 1953, which in 2025–26 remains around 11.38% per annum.

For vendors, failure to manage the withholding does not attract a separate penalty, but the vendor will have overpaid tax that cannot be refunded until their income tax return is lodged and processed. In the interim, the vendor loses the use of the funds. This is a particular problem for foreign resident mortgage borrowers who may be relying on the net proceeds to fund a replacement property or repay other liabilities.

What Foreign Resident Borrowers Should Do Before 2026

The 1 July 2025 start date means that any property sale contract exchanged on or after that date will be subject to the new rules, regardless of when settlement occurs. Mortgage borrowers who are foreign residents should act now to:

• Model the impact of a 15% withholding on their expected net sale proceeds and test it against the outstanding mortgage balance, break fees, and agent commissions.
• Engage the lending institution early to understand how the bank intends to handle settlement shortfalls and whether a short‑term bridge loan facility is available.
• If selling before 1 July 2025, aim to exchange contracts prior to that date to lock in the 12.5% rate and the $750,000 threshold.
• If selling after 30 June 2025, apply for a variation of withholding as soon as the contract is signed, using an estimated capital gain or loss, to reduce the withholding to the correct amount.
• Ensure the purchaser’s settlement agent receives the variation notice or clearance certificate in sufficient time—settlement agents typically require the document at least seven days before settlement.

Conclusion

The current foreign resident CGT withholding rate of 12.5% and the $750,000 threshold have shaped property sale settlements for the past eight years. From 1 July 2025—the threshold disappears and the rate becomes 15%, affecting every foreign resident disposal of Australian taxable property from the 2026 income year onward. For mortgage borrowers, the practical consequence is a larger cash outflow at settlement, which must be accommodated within loan discharge structures and sale proceeds planning.

The ATO’s administrative processes for clearance certificates and variations will remain, but the expanded scope of withholding will put pressure on processing times and on the market’s capacity to settle on time. Mortgage professionals, conveyancers, and borrowers alike will need to adjust their workflow and risk management to reflect a regime where the default is that 15% of the sale price belongs to the ATO on settlement day.

Information only, not personal financial advice. Consult a licensed mortgage broker.