In this article, we explore the Government’s proposed reform to the foreign resident capital gains tax (CGT) rules and the implications this will have on foreign investors.
Treasury has released an Exposure Draft proposing significant amendments to Australia’s CGT regime. The proposed changes seek to materially expand the circumstances in which foreign investors are subject to CGT in Australia, affecting Australia’s attractiveness as a destination for foreign capital. In addition, certain amendments to the meaning of ‘real property’ are intended to apply retrospectively and prospectively, extending to past, current and future transactions, including matters currently before the courts. Transitional relief would be available only for a limited class of renewable energy assets, and only until 2030.
Background: When are non-residents currently subject to CGT?
Currently, CGT generally only applies to foreign residents on the disposal of “taxable Australian property”, which includes:
- Taxable Australian Real Property (TARP): TARP is real property situated in Australia, which includes leases of Australian land, and mining, quarrying and prospecting rights (if the minerals, petroleum or quarry materials are located in Australia).
- Indirect Australian Real Property Interests (IARPI): IARPI are, broadly, shares in a company (or units in a trust), where more than 50% of that company’s or trust’s assets by market value comprise TARP. To constitute IARPI, the shares or units must comprise an interest of 10% or more in the company or trust, and must also satisfy the ’principal asset test’ (PAT) at the time of the disposal. The PAT is the calculation mechanism to determine whether the 50% threshold is satisfied – if the market value of the company’s TARP assets exceeds the market value of the company’s non-TARP assets at the time of the disposal, the PAT will be satisfied.
Key changes to foreign resident CGT under the Exposure Draft
| Expanded TARP definition | The definition of TARP has been expressly extended to include:
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| New statutory definition of “real property” | “Real property” is to be defined inclusively (that is, building on the ordinary meaning) and captures:
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| PAT extended to 365-day look-back | The PAT is currently applied only at the time of disposal. Under the proposed amendments, the PAT can be satisfied at any time during the preceding 365 days, reducing the ability to manipulate the asset composition of the company or trust immediately prior to the sale, and materially increasing compliance and valuation burdens for foreign investors in indirect structures. |
| Mining, quarrying and prospecting information (MQPI) to be included in PAT calculation | MQPI must be included in the TARP value calculation for PAT purposes, even though MQPI itself is not classified as TARP. This can inflate the TARP proportion above the 50% PAT threshold, bringing otherwise non-taxable share or unit disposals into the CGT net. |
| ATO notification for transactions of $50 million or more | Foreign resident vendors disposing of membership interests must notify the Commissioner when making a non-IARPI vendor declaration.
Purchasers are now subject to an objective (not subjective) knowledge standard when relying on foreign resident capital gains withholding declarations. |
| Retrospective application | “Real property” in the TARP definition is taken to have always included:
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| 50% CGT discount for Australian renewable energy assets – transitional relief to 30 June 2030 | A 50% discount can apply to certain sales and disposals occurring from commencement of the legislation to 30 June 2030 only;
Assets not yet constructed or only partly constructed may qualify in some circumstances. For example, land identified for a project, grid connection agreements, development approvals or rights to future income under an offtake agreement may be regarded as assets that are genuinely intended to be used to produce electricity from an eligible renewable energy source. Renewable energy assets (wind turbines, solar panels, batteries) were often historically not considered TARP under the general law fixture test. The proposed changes now bring them within the CGT net, making this 50% discount the primary, and very limited, transitional relief for the sector. The discount does not apply to historical exits, which remain fully exposed to the retrospective changes to the definition of ‘real property’. |
Potential impacts
- Foreign residents holding assets with a close economic connection to Australian land or natural resources, directly or indirectly, face materially increased CGT exposure, including in infrastructure, energy, resources and real estate sectors.
- Historical transactions dating back to December 2006 may be revisited by the ATO. Australian tax returns not lodged on past disposals (because no tax was considered payable at the time) are particularly exposed, as no four-year amendment limitation period applies. Since the Exposure Draft was announced, the ATO has indicated that previously finalised settlements will not generally be re-opened, except in limited circumstances. Rather, the ATO’s focus will be on disposals currently under review or occurring within the last four years. However, the ATO retains discretion to review older matters that come to its attention. For example, where a taxpayer seeks a ruling involving real property, the ATO may consider any retrospective implications. In practice, this would suggest that the ATO is preserving flexibility to scrutinise disposals dating back to December 2006 notwithstanding its stated focus.
- Proposed changes bring renewable energy assets (wind, solar, batteries) within TARP for the first time, in direct conflict with Australia’s net zero and renewable energy targets. Industry bodies have raised concerns that the new tax burden, imposed on assets that foreign investors historically understood to be CGT-exempt, will dampen foreign investment in Australian clean energy infrastructure. Combined with earlier changes to stapled structure and thin capitalisation rules, the cumulative tax burden risks making Australian renewable energy projects uneconomic for offshore investors. Any gap left by retreating foreign capital is unlikely to be filled by Australian institutional investors.
- Existing structures involving infrastructure, fixtures, water entitlements or options over land may be re-characterised as TARP under the new statutory definition.
- The following applies to any transaction with an aggregated value of $50 million or more involving a non-IARPI vendor declaration:
- The vendor must notify the ATO prior to completion. Where there are more than 31 days between signing and completion, at least 28 days’ notice to the ATO is required. For periods that are shorter than 31 days, notice must be given as soon as reasonably practicable after signing and must be provided before completion.
- Vendor’s non-IARPI declaration is invalid unless the ATO has been notified. Purchasers must seek and retain evidence of ATO notification as part of their due diligence process.
- Purchasers cannot passively rely on vendor declarations. Active due diligence is required. Reviewing ASIC and ABR extracts, transaction documents, residency disclosures and the vendor’s TARP position, particularly where TARP valuations are difficult or uncertain.
- The ATO notification requirement and heightened due diligence standard will add process steps and time to M&A timelines. These should be built into deal timetables and transaction documentation from the outset.
- If the vendor fails to notify the ATO within the required period, or if the ATO raises concerns about the declaration, the purchaser must withhold and remit 15% of the purchase price to the ATO. Penalties for failing to withhold start at $7.5 million (based on the $50 million minimum threshold). There are no carve-outs for related-party transactions or internal reorganisations.
Final thoughts
We expect significant industry and practitioner pushback on the draft legislation, particularly the retrospective elements, potential inconsistency with (and override of) Australia’s bilateral tax treaty obligations, and the broader effect on foreign investment into Australia. In a globally competitive market, increased tax costs (and increased uncertainty) are undisputedly likely to shift capital elsewhere.
The consultation window closes on 24 April 2026. A notably compressed timeframe given the breadth of the proposed changes, suggesting Treasury intends to progress the legislation quickly and/or the Government intends to finalise its position prior to the Federal Budget. That said, depending on the strength of the industry response, the consultation period may potentially be extended.
Further guidance will be circulated once a Bill (or further guidance) is released and as the legislation progresses through Parliament.
Please feel free to contact Seema Sandhu or Mark Payne to discuss further.
