FRCGW 15% Rule Explained (Australia 2025-26)

General information only. Speak with a registered tax agent for advice.

From 1 January 2025, a 15% withholding rate applies to sales of Australian real property unless the vendor produces a valid clearance certificate or variation notice. This article explains why the rule exists, exactly how it works, and what both vendors and buyers need to do in practice.

Why this rule exists

The foreign resident capital gains withholding (FRCGW) regime was introduced in 2016 to address a specific compliance problem: foreign residents were selling Australian real property and leaving the country without paying their CGT obligations. By the time the ATO assessed the liability, the funds had often left Australia and recovery was difficult.

The withholding mechanism shifts the collection point to settlement. The buyer retains a portion of the purchase price and hands it directly to the ATO. The vendor receives the net proceeds and then either gets a refund (if the withheld amount exceeds the actual tax) or pays more (if it does not cover the full liability).

From 1 January 2025, the ATO tightened the rules further:

• Rate increased from 12.5% to 15%
• Threshold removed entirely (previously applied only to property valued at $750,000+)

These changes mean FRCGW now touches nearly every property transaction in Australia.

The 15% rate in detail

The withholding is calculated on the market value of the property (effectively the contract price in most arm’s-length transactions), not on the capital gain itself. This is important: the 15% can easily exceed the actual CGT payable, particularly for:

• Long-held properties with a high cost base
• Properties with minimal gain
• Australian residents who have no CGT liability at all

This is why the clearance certificate system exists — it allows Australian residents (who owe no tax or who will settle their liability through a return) to avoid the cash-flow disruption of a 15% upfront withholding.

The clearance certificate: step by step

For Australian resident vendors, the clearance certificate is the standard solution. Here is the process:

Step 1: Engage your conveyancer or solicitor early Clearance certificate requirements should be flagged at the time you list the property, not at exchange. Processing can take 14+ business days in busy periods.

Step 2: Apply online through the ATO portal Applications are free. You will need your TFN, personal details, and property information. Joint owners must each apply separately.

Step 3: ATO processes the application Straightforward cases typically resolve in 1–5 business days. Complex situations (tax debts, prior lodgement issues, identity mismatches) can take longer. The ATO has a priority processing pathway for urgent cases — contact the ATO directly if settlement is imminent.

Step 4: Receive and provide the certificate The certificate must be provided to the buyer at or before settlement. It is valid for 12 months. One certificate covers one vendor; co-owners need separate certificates.

Step 5: Settlement proceeds in full With a valid certificate, the buyer has no withholding obligation. The vendor receives the full contract price. CGT is dealt with at return time.

Variation applications for foreign residents

A foreign resident vendor can apply for a variation if 15% would over-withhold. Common scenarios:

• The vendor has substantial capital losses from other assets
• The property is subject to a rollover or exemption
• The vendor’s treaty position results in a lower effective rate
• The cost base is high relative to the sale price

A variation notice specifies a lower rate — potentially zero. The buyer must apply the variation rate stated on the notice rather than the standard 15%.

Variation applications require the vendor to estimate their actual CGT liability. The ATO will assess the application and may request supporting information. Timeline is less predictable than clearance certificates, so early application is critical.

What buyers must do

Buyers are the withholding agents under this regime. Their obligations:

Situation	Buyer’s obligation
Valid clearance certificate provided by vendor	No withholding required
Valid variation notice provided by vendor	Withhold at the rate stated on the notice
No certificate or variation notice	Withhold 15% of the purchase price

If no certificate or variation is provided, the buyer must:

1. Withhold 15% from the payment to the vendor at settlement
2. Complete the FRCGW payment form (available on the ATO website)
3. Pay the withheld amount to the ATO by the next business day after settlement

Failure to withhold does not extinguish the liability — it transfers it to the buyer. If the ATO later determines that withholding was required and was not made, the buyer is liable for the amount that should have been withheld, plus interest and potential penalties.

Common scenarios

Scenario	What applies
Australian resident vendor with clearance certificate	No withholding
Australian resident vendor — no certificate, $500k sale	15% withheld = $75,000
Australian resident vendor — no certificate, $1.2M sale	15% withheld = $180,000
Foreign resident vendor — no variation, $900k sale	15% withheld = $135,000
Foreign resident vendor — variation approved at 5%, $900k sale	5% withheld = $45,000
Foreign resident vendor — variation at nil, $900k sale	No withholding

The withholding is not the final tax

A common misconception: some vendors (and even some buyers) think the 15% is a final tax. It is not. It is a prepayment against the vendor’s eventual CGT liability. The vendor’s actual position is determined in their tax return:

• If the withheld amount exceeds the actual liability, the ATO refunds the difference.
• If the withheld amount falls short, the vendor pays the balance on assessment.

For an Australian resident with no capital gain (e.g., selling for a loss or the property was a main residence), the entire withheld amount is refundable. But that refund may take months to arrive after lodgement.

Contract implications

FRCGW is now standard boilerplate in Australian property contracts. Vendors and their solicitors typically include a clause:

• Confirming the vendor’s obligation to provide a clearance certificate
• Authorising the buyer to withhold if the certificate is not produced before settlement
• Setting a deadline for certificate delivery (commonly at least 14 days before settlement)

Buyers’ solicitors routinely request the certificate as part of pre-settlement checks. Any contract that does not address FRCGW creates risk for both parties.

Urgency and the priority pathway

If the settlement date is imminent and the vendor has not yet applied for a clearance certificate, the ATO offers a priority processing pathway. Vendors must:

• Call the ATO directly
• Explain the urgency and provide the settlement date
• Have all required documentation ready

Priority processing is not guaranteed to resolve in time, but it is the best option when standard processing timelines would be exceeded.

Sources

• ATO paying FRCGW
• ATO clearance certificates (Australian residents)