Overview of foreign resident CGT rules
Under Australia's capital gains tax (CGT) regime, a capital gain or loss made by a foreign resident is disregarded unless it arises from the disposal of 'taxable Australian property' (TAP). TAP includes, amongst other things:
- 'taxable Australian real property' (TARP); and
- 'indirect Australian real property interests' (IARPI).
Broadly, TARP encompasses freehold and leasehold interests in real property situated in Australia and certain Australian mining, quarrying or prospecting rights.
'Real property' for TARP purposes has historically been interpreted by reference to property and stamp duty legal principles. However, Treasury Laws Amendment (Strengthening Accountability for Tax Adviser Misconduct and Other Measures) Act 2026 (Act) has now introduced a new statutory definition that significantly broadens the scope of real property, as discussed below.
IARPI are membership interests (units / shares) in an entity (trust / company) that satisfy both the:
- 'non-portfolio interest test' (NPIT), which broadly requires a 10% or greater interest in the entity; and
- 'principal asset test' (PAT), which is broadly satisfied where more than 50% of the market value of the entity's assets is attributable to TARP.
In a highly competitive global environment for the attraction of foreign capital the legislative changes increase the scope of Australian CGT, introduce greater regulation and add further complexity to a swiftly evolving tax landscape for foreign investors.
What are the key changes?
New definition of 'real property'
The Act provides a new statutory definition of real property, which now covers a very broad range of assets with a close economic connection to Australian land or natural resources, including:
- any interest in or right over land (regardless of how that interest or right is treated for the purposes of any State law or Territory law);
- a personal right to call for or be granted any interest in or right over land;
- a licence or contractual right exercisable over or in relation to land;
- a thing (or a combination of things) that are fixed or installed on land (whether it is a fixture, or treated in any other way, for the purposes of any State law or Territory law or at general law); and
- a lease, licence or contractual right exercisable over an asset mentioned in paragraph (d).
The practical effect of this is significant. For example, energy infrastructure assets such as wind turbines, transmission lines, solar panels and substations will now constitute real property and therefore TARP, regardless of whether they are fixtures at general law or are statutorily severed from the land. Under State or Territory law. The Explanatory Memorandum (EM) provides an example that where a mining company has affixed plant and equipment (P&E) to Australian land under a mining lease which it must remove at the expiry of the lease, although the P&E will be chattels at general law, they will be regarded as real property for foreign resident CGT purposes.
Expanded definition of TARP
The new definition of real property feeds into a considerably expanded definition of TARP, as follows:
- real property that is situated in Australia;
- real property that relates to land situated in Australia;
- real property that relates to a thing (or combination of things) fixed or installed on land situated in Australia;
- a mining, quarrying or prospecting right (to the extent that the right is not real property), if the minerals, petroleum or quarry materials are situated in Australia;
- a water entitlement in relation to a water resource situated in Australia; or
- an option or right to acquire a CGT asset covered by any of the above categories.
As noted above, the definition of TARP is also directly relevant to determining the existence of IARPI, being membership interests that pass the PAT and the NPIT.
The Act provides that, for the purposes of the PAT, mining, quarrying or prospecting information relating to an area in Australia is treated as if it were TARP.
The expanded definition of real property therefore has a cascading effect as broadening what constitutes TARP results in a wider range of membership interests that may fall within the scope of the foreign resident CGT regime.
365-day PAT look-back
The PAT, which applies when determining whether membership interests are IARPI and therefore TAP, will now be satisfied if the relevant interest passes the PAT at the time of the CGT event, or at any time during the 365-day period preceding that time. This replaces the existing point-in-time test, which applies only at the time of the CGT event. The Treasurer has the power to prescribe an alternative testing time by legislative instrument for particular classes of foreign investors. This power is intended to assist foreign residents that do not control the entity and rely on publicly available information (such as quarterly reports) rather than having access to sufficient data to apply the full 365-day test.
The practical effect of the PAT look-back is that the composition of an entity's assets over the preceding 365-day period may determine whether membership interests are TARP. This will theoretically require a valuation of the underlying assets for every day in the 365-day period, which would be difficult to assess retrospectively, though in practice valuations may be obtainable for date ranges, particularly for stable assets. It may prove more difficult for mining companies whose valuations depend on movements in the prices of natural resources. Entities with foreign ownership will need to establish ongoing monitoring processes, particularly where asset values fluctuate within proximity of the 50% TARP threshold.
Foreign vendor ATO notification
For foreign vendor transactions involving membership interests with a market value of A$50 million or more (including under 'split transactions'), the Act introduces a new vendor ATO notification requirement.
Where a foreign vendor fails to comply with this requirement, the purchaser must pay to the ATO 15% of the purchase price under the foreign resident capital gains withholding (FRCGW) rules, usually treated as a contractual withholding from the purchase price.
More specifically, a foreign vendor that intends to declare that the relevant membership interests being divested are not IARPI must give the Commissioner of Taxation (Commissioner) notice in the approved form.
Where the period from signing to settlement is greater than 31 days, the notice must be given at least 28 days before settlement. Where that period is 31 days or less, the notice must be given as soon as reasonably practicable after entering the sale contract (and definitely before settlement).
The vendor must also give the purchaser a written declaration confirming that the ATO notification has been given and stating the day on which it was given.
Purchaser due diligence – stricter knowledge standard
Under the existing regime, a purchaser cannot rely on a declaration where the purchaser has actual knowledge that it is false.
The Act replaces this subjective test with an objective standard, placing a significantly higher burden on purchasers to undertake due diligence. The requirement now is that a purchaser must not know or reasonably be expected to know that the declaration is false, at any time during the period beginning when the vendor declaration is given and ending immediately before the purchaser acquires the CGT asset.
Double tax agreement override
To the extent that a double tax agreement (DTA) provides that the expressions 'real property', 'immovable property' or 'land' have the meaning given under Australian law, the Act provides that for the purposes of that DTA, the expression is taken to mean TARP within the meaning of the ITAA 1997 (as outlined above). Accordingly, DTA provisions which adopt Australian domestic law meanings for these expressions will now reflect the expanded TARP definition.
Foreign investors that have planned to rely on the real property or immovable property provisions of a DTA should review those positions in light of the expanded DTA override.
Renewable energy CGT discount
The Act includes a transitional 50% CGT discount for eligible foreign residents disposing of Australian renewable energy assets. An Australian renewable energy asset is defined as a CGT asset that is TARP and has the primary purpose of either generating or producing electricity in Australia using an eligible renewable energy source, or operating as an energy storage system for such electricity.
The primary purpose test requires the asset to be used for renewable energy generation more than any other purpose, although it remains unclear how this will be measured (for example, by reference to time or financial return). Assets which are only partly or not yet constructed may not satisfy the requirement unless the surrounding circumstances objectively demonstrate that the assets are intended to be used for renewable energy generation (having regard to the land identified for the project, grid connection agreements, development approvals, or rights to future income under an offtake agreement).
The 50% CGT discount is available to foreign residents (other than individuals) and trustees of foreign trusts. The CGT discount will not flow through a foreign resident trust to benefit beneficiaries that are foreign resident individuals. Entry into the sale contract must occur on or after 1 October 2026 and before 1 July 2040. Unfortunately, this means that the 50% CGT discount is not available for sale contracts entered before 1 October 2026, even if they settle on or after 1 October 2026.
With respect to indirect disposals, a membership interest satisfies the renewable energy asset test if at least 75% of the market value of the relevant underlying entity's TARP assets is attributable to Australian renewable energy assets. The market valuation approach to be used for valuing the renewable energy assets must be the same as that used for the PAT.
Additionally, an integrity rule applies that requires the market value of any asset to be disregarded if it was acquired for the purpose of ensuring that a membership interest passes the above test.
Limit on amending past assessments
The Act prevents the Commissioner from amending a past assessment in relation to a foreign resident's capital gain on divestment of TARP or IARPI where the limited amendment period (generally four years) has already expired, unless the amendment relates to fraud or evasion or gives effect to a decision on an objection made before 10 April 2026.
What are the key impacts for foreign investors?
This is a very significant CGT reform package with immediate practical consequences for all current and prospective foreign investors in land, natural resources and infrastructure, given the combination of measures such as a broader real property definition, a 365-day PAT look-back and the new foreign vendor notification regime.
Important issues for foreign investors and their advisers to consider include:
1. Transaction structuring and timing
The expanded TARP definition means that assets previously outside the CGT net, such as things installed on land that may not be fixtures at law and contractual rights exercisable over land, will now be within scope. This may affect deal valuations and other key deal considerations.
2. Ongoing monitoring for the 365-day test
Entities with foreign ownership of membership interests will need to establish processes for monitoring whether the PAT is satisfied at any point during the 365 days preceding a disposal, particularly where asset values fluctuate within proximity of the 50% TARP threshold.
3. Notification compliance
For transactions involving membership interests valued at A$50 million or more, the notification and declaration steps must be built into the deal timeline from the outset. Given that a failure to notify the ATO will trigger the obligation to pay 15% of the purchase price under the FRCGW rules, purchasers will need to obtain evidence that the vendor has given the required notification. The FRCGW clause in any sale agreement should expressly address these requirements, and the notification timeline should be factored into conditions precedent and completion mechanics.
4. Purchaser due diligence
The shift from a subjective to an objective knowledge standard for purchaser reliance on vendor declarations means that purchasers should conduct thorough due diligence on the vendor's tax residency status, the PAT and the NPIT.
This may have significant implications for transaction timetables. The EM clarifies that purchasers are expected to undertake and document proportionate, customary checks (such as reviewing ASIC and ABR extracts, transaction documents and residency disclosures), address obvious inconsistencies through routine queries and retain records.
5. Renewable energy investments
The 50% CGT discount for renewable energy asset disposals, with its extended sunset to 1 July 2040 and reduced indirect threshold of 75%, provides meaningful transitional relief for foreign investors in Australian renewable energy assets. In addition, the express inclusion of energy storage systems broadens the scope of eligible assets.
6. DTA positions
Foreign investors that have entered into investments in reliance on the real property or immovable property provisions of a DTA should review those positions considering the expanded DTA override.
7. No transitional cost base reset
There is no market value cost base reset for assets that are newly brought within the regime under the expanded definition and there is no grandfathering of existing rules for disposals of assets that were acquired before commencement. Gains that accrued before commencement may still be taxed on a later disposal, even though the expanded definition applies only prospectively.
8. Managed investment trust considerations
The expanded real property definition does not alter the definition of eligible investment business (EIB) used to assess managed investment trust (MIT) and public trading trust status. This means that an investment in land primarily or solely for the purpose of deriving rent will still need to be assessed by reference to general law concepts. The reforms will further entrench the difference in tax outcomes for foreign investors that invest in eligible Australian land assets through MIT structures (generally a final 15% withholding tax rate) versus those who invest through non-MIT structures holding real property subject to CGT (minimum 30% tax rate). In addition, the expanded definition of real property may result in historical MIT fund payments being greater than previously calculated, which could give rise to under-withholding exposure for trustees and unitholders (noting that no limitation period applies to withholding taxes). MITs and their advisers should review historical fund payment calculations and ongoing withholding positions in light of these changes.
In this rapidly evolving and complex Australian tax landscape, now is the time to review existing and pipeline transactions in the context of the foreign resident CGT legislative changes and assess the potential impact on structuring, pricing and deal timelines. If you would like to discuss how these reforms may affect your investments or transactions, please contact us using the details below.
