Foreign Resident Capital Gains Withholding Variation

A foreign resident capital gains withholding variation can reduce your vendor client’s property withholding when it exceeds their expected Australian tax. Support the application with a vendor-share calculation, then give the purchaser the issued notice by settlement.

Check the Vendor and Asset

Foreign resident capital gains withholding (FRCGW) requires the purchaser to pay part of the property sale proceeds to the Australian Taxation Office (ATO). The vendor claims the payment as a credit through their Australian tax return.

Establish your client’s tax residency from their circumstances, including any changes during ownership. Citizenship and a foreign address alone do not settle the question. Identify the vendor entity and Australian property, then match their ownership share to the title and contract. For a trust, distinguish the trustee holding title from the entity reporting the gain.

An Australian-resident vendor generally follows the FRCGW clearance certificate route. A foreign-resident vendor seeks a variation when the standard withholding exceeds their estimated Australian tax liability. Prepare a separate application for each vendor seeking a variation.

For contracts under the current rules, the standard rate is 15% and there is no minimum property value threshold. Older contracts can have different rates and thresholds. Use the ATO’s contract-period rules to select the applicable treatment from the contract date.

Establish the Variation Grounds

Compare the standard withholding on your client’s share with the Australian tax expected from the disposal. A small taxable gain can justify seeking a lower rate even when the property sells for a large amount. The ATO decides the rate from the application and evidence.

Support the particular ground your client relies on:

• For a capital loss, reconcile proceeds with the reduced cost base and retain the supporting records.
• For carried-forward capital losses, trace the balance to prior returns and capital gains tax (CGT) schedules. Explain how much remains available after other expected gains.
• For a rollover or exemption, identify the provision and show how the client meets its conditions. Attach the records establishing eligibility.
• For a lower tax liability, show the gain and relevant income-year tax calculation. Explain any income losses used and support their availability with accounts and applicable loss tests.

Where carried-forward losses support the request, obtain the vendor’s signed statement about their expected availability at year end. It must address other potential transactions that could change the position. A loss shown in an old return can already have been used.

Apply foreign-resident CGT treatment before calculating the requested rate. A former home does not automatically qualify for the main residence exemption. The ATO limits foreign-resident access to that exemption, including the life events test. Ownership for more than 12 months alone also does not establish discount entitlement.

Build the Supporting Calculation

Calculate the vendor’s gain and expected tax separately from the withholding on gross sale proceeds. Show whole-property figures alongside the vendor’s fraction so the purchaser can trace the requested rate to the correct interest.

Consider a fictional individual selling a 60% interest in an Australian investment property under a contract in the 2025-26 income year. They acquired the interest in 2018 and remain a foreign resident throughout ownership. The other owner holds 40% and supplies a valid clearance certificate.

Assume an arm’s-length sale for $1 million. The supported whole-property cost base is $900,000: acquisition costs of $780,000, incidental acquisition and sale costs of $40,000 and eligible improvements of $80,000. The figures already exclude deductible costs and reflect required adjustments for capital works deductions.

Fictional Vendor Workpaper

The individual has no other Australian taxable income, offsets or income losses in this example. Their $40,000 net capital gain is their taxable income. The ATO’s 2025-26 foreign-resident rates apply 30% to this amount, producing $12,000 tax. Foreign residents do not pay the Medicare levy.

No CGT discount, rollover or exemption applies in the example. The vendor’s foreign residency throughout ownership of an asset acquired in 2018 means no discount is available. The ATO explains the foreign-resident discount conditions.

Divide $12,000 estimated tax by $600,000 vendor proceeds to request 2% withholding. The requested reduction is $78,000, subject to ATO approval. Other income, loss use or a changed sale price can change the estimate. The eventual tax assessment uses the completed return’s actual figures.

Collect Authority and Application Records

Collect the application records before lodging so the vendor and calculation can be checked together. Use the current variation form instructions and NAT 74885 form.

Keep the following records in the file:

• The vendor’s full entity name, entity type, address and contact details, with date of birth for an individual or trustee details where relevant.
• The vendor’s TFN or ABN where available. Quoting a TFN is optional on this application, although it helps the ATO identify the vendor.
• Your contact details and authority to prepare and lodge for that vendor. Complete separate applicant details where the application requires them.
• The property address and tenancy details, legal ownership percentage, contract date and expected settlement date.
• The sales contract, purchase contract if available, purchaser details and settlement representative’s contact details. Use these to identify the transaction and arrange delivery of the outcome.
• The calculation of the requested rate, cost records and evidence for each loss, concession or other ground claimed. Include a valuation report where the calculation relies on a valuation.

Record each owner’s interest and authority separately. One vendor’s instruction does not authorise you to act for a co-owner, and one notice does not cover every owner.

Before making the agent declaration, obtain the vendor’s declaration that their information is true and correct. Retain their authority for you to give the application to the Commissioner. The form also requires your declaration that you prepared it from the vendor’s information.

Apply Before the Settlement Checkpoint

Lodge the variation early enough to receive and hand over the decision before settlement. The ATO says variations take up to 28 days to process. That guidance does not guarantee a decision before a short settlement.

The ATO also requires the foreign resident’s Australian tax affairs to be up to date where applicable. Lodge due rental-income and other returns and address due ATO tax debts before applying.

1. Open the ATO’s online FRCGW variation application. Online lodgement is the preferred route. If you cannot use it, download NAT 74885 through the instructions and use its listed lodgement method.
2. Enter the vendor and representative details from the authority records. Identify the asset, ownership percentage and contract and settlement information.
3. Select the supported variation reason and enter the requested withholding rate. Reconcile the sale value and cost amounts with the attached workpaper.
4. Attach the sales contract and supporting calculation, with the purchase contract if available. Include the evidence supporting losses or the particular concession claimed.
5. Complete the applicable declaration after the client confirms the information. Submit the application and save the confirmation or transmission receipt with the exact form and attachments lodged.
6. Track the outcome against settlement and answer any ATO requests for information. When the notice arrives, check it and send the actual notice to the purchaser.

The settlement checkpoint is delivery of the effective ATO notice at or before settlement. An application receipt or a pending decision does not authorise a lower deduction. If the notice has not arrived, tell the settlement representative to apply the required withholding and retain the payment evidence.

Check and Hand Over the Notice

Check the issued notice against the transaction before asking the purchaser to apply it. Match the vendor’s name and ownership records, the specified asset and the approved rate or amount. Check any expiry, transaction period and other operating conditions on the notice.

Confirm that the final sale price or applicable market value does not exceed the notice’s maximum sale price. A higher final price can make the variation inapplicable. Resolve an incorrect name, changed asset or expired notice with the ATO before relying on it.

Under section 14-235 of Schedule 1 to the Taxation Administration Act, a particular variation takes effect when the purchaser becomes aware of it. Send a complete copy to the purchaser or their settlement representative. Obtain confirmation that they received it and will apply its approved treatment to the correct vendor share.

Ask the settlement representative to show the expected deduction on the draft settlement statement. In the fictional example, an effective 2% notice produces $12,000 withholding for the foreign vendor. The co-owner’s clearance certificate covers their separate interest.

If a notice fails its conditions, correct the problem before settlement or use the applicable standard withholding. Keep the notice, delivery evidence and final settlement instructions together.

Reconcile Withholding With the Return

Reconcile the final settlement statement with the vendor’s share and the purchaser’s payment confirmation. Check the amount actually paid to the ATO, including any standard withholding because a variation arrived too late.

For the fictional vendor, approval and timely delivery of the 2% notice means a $12,000 payment. Without an effective notice, standard withholding is $90,000 on their share. Neither amount decides the final tax liability.

Report the disposal and claim the supported credit in the income year the sale contract was signed. Settlement or payment in the next income year does not move the credit to that later return. The ATO’s variation guidance explains this return-year treatment and requires the purchaser’s Payment Confirmation.

Enter the amount at the return’s Credit for foreign resident capital gains withholding amounts label. It is not pre-filled. Retain the disposal workpaper, final costs and loss reconciliation alongside the notice and payment confirmation.

If the return supports $12,000 tax and $90,000 withholding, the difference is $78,000 before other tax liabilities or debts affect the assessment. Confirm the posted credit and assessment outcome before telling the client what refund they will receive.