With the Labor Government securing another term, previously announced changes to Australia’s foreign resident capital gains tax (CGT) regime are again in focus.
Need to know:
- Reforms aim to clarify and broaden the types of assets subject to CGT for foreign residents – include assets that have a “close economic connection” to Australian land. The “principal asset test” to be amended to include a 365-day testing period, rather than the existing point-in-time test, which only applies at the time of disposal.
- Changes to require foreign residents disposing of shares and other membership interests exceeding A$20 million in value to notify the Australian Taxation Office (ATO), prior to the transaction being executed.
- While draft legislation has not yet been introduced, foreign investors with Australian assets should prepare for potential impacts on future disposals and exit strategies.
The Albanese Government is back, and so are their proposed changes to Australia’s foreign resident capital gains tax (CGT) regime.
Originally proposed in the 2024-25 Budget, the measures aim to clarify and broaden the types of assets subject to CGT for foreign investors. They were expected to come into effect from 1 July 2025, however no draft legislation has yet been tabled.
A key focus of the consultation process that led up to the announcement of the proposed new measures was the concept of “fixtures” and whether or not they are included in the concept of real property.
The term “real property” isn’t defined in tax law, as such it takes on its everyday ordinary meaning. In contrast, the legal meaning of the term Real Property is dependant on the legislative context and the legal meaning comes from both common law and State and Territory legislation which expands on and adds to that common law concept.
Under common law, “real property” includes land and anything permanently attached to it (called “fixtures”). But in recent years, State and Territory laws have expanded this concept to also include items that are simply fixed to the land, even if they aren’t fixtures in the traditional legal sense.
During consultations, Treasury noted that it’s unclear whether the ordinary meaning of “real property” is the same as the legal definition. This uncertainty has made it harder to know which assets count as part of the land, especially since different States and Territories use different definitions in their laws.
This uncertainty is the rationale for the introduction of a new ”close economic connection to Australian land” test.
Subject to the draft legislation, which is yet to be released, the intention behind the proposed measures would result in:
- the clarifying and broadening of the types of assets on which foreign residents will be subject to CGT to include assets that have a “close economic connection” to Australian land;
- the amendment of the “principal asset test” (which operates to test whether an entity’s value is principally derived from Australian real property) to include a 365-day testing period, rather than the existing point-in-time test, which only applies at the time of the disposal; and
- the introduction of a notification requirement for foreign residents disposing of shares and other membership interests exceeding A$20 million in value to notify the ATO prior to the transaction being executed.
Relevantly, the concept of a “close economic connection ” to Australian land will apply to infrastructure and machinery installed on land situated in Australia, including land subject to mining, quarrying or prospecting rights, for example:
- energy and telecommunications infrastructure, such as wind turbines, solar panels, battery energy storage systems (BESS), transmission towers, transmission lines and substations;
- transport infrastructure, such as rail networks, ports and airports; and
- heavy machinery installed on land for use in mining operations, such as mining drills and ore crushers.
Foreign residents investing in Australia should consider the detail of these proposed changes as further information is released and the tax impact of those changes on disposals of Australian assets or their eventual exit from Australia.
For more information, please contact Mark Payne, Seema Sandhu.
