Australia’s capital gains tax reforms for foreign residents

This article was written by Dhanushka Jayawardena, Partner at Holding Redlich.

On 10 April 2026, the Australian Treasury released exposure draft legislation that, if enacted, will materially expand the scope of Australia’s capital gains tax (CGT) regime for foreign residents.

The reforms implement and, in several respects, go beyond, the 2024-25 Federal Budget measure to strengthen the foreign resident CGT regime. They are accompanied by a separate, time-limited 50 per cent CGT discount for qualifying disposals of Australian renewable energy assets.

For private clients, family offices, sovereign wealth vehicles, pension funds and private equity managers in Europe and Asia-Pacific with direct or indirect exposure to Australian land, infrastructure, energy or resources, the implications are significant. Several aspects of the reforms apply retrospectively to 12 December 2006, the date on which Division 855 of the Income Tax Assessment Act 1997 (ITAA 97) commenced.

This article sets out the principal features of the proposed reforms and identifies the practical issues that international private wealth advisers should be considering now.

The current framework

Under Australia’s existing foreign resident CGT regime, capital gains and losses made by a foreign resident are disregarded unless the relevant CGT asset is ‘taxable Australian property’. That term captures five categories of assets, the two most commercially significant of which are:

• Taxable Australian real property (TARP), broadly real property situated in Australia (including a lease of Australian land) and mining, quarrying or prospecting rights where the relevant resources are located in Australia
• Indirect Australian real property interests (IARPIs), being non-portfolio membership interests (10 per cent or more) in an entity whose underlying value is principally derived from TARP, as determined by the ‘principal asset test’ (PAT).

The term ‘real property’ hasn’t previously been defined in Australia’s income tax law and has been understood to take its general law meaning. That position was recently confirmed by the Federal Court in YTL Power Investments Limited v Commissioner of Taxation [2025] and Newmont Canada FN Holdings ULC v Commissioner of Taxation (No 2) [2025].

Broadening the TARP base

The exposure draft inserts a new, inclusive definition of ‘real property’ into subsection 995-1(1) of the ITAA 97. The defined term will operate across the ITAA 97 and the Taxation Administration Act 1953 (TAA 53).

‘Real property’ will include:

• Any interest in or right over land, regardless of how that interest or right is treated under state 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 combination of things) fixed or installed on land that is, or is reasonably expected to be, situated on the land for the majority of its useful life, regardless of whether it’s a fixture or treated in any other way under state or territory law or at general law
• A lease of such a thing
• A licence or contractual right exercisable over such a thing.

Section 855-20 is correspondingly expanded so that TARP includes real property situated in Australia, real property relating to land in Australia, real property relating to things fixed or installed on land in Australia, Australian water entitlements and options or rights to acquire any of those assets.

The practical consequences are substantial. Assets that have previously been outside the TARP definition because they weren’t fixtures at general law, or were statutorily severed from the land, will now be in scope. These include wind turbines, solar panels, large-scale battery energy storage systems, transmission and distribution networks, pipelines, mining plant and equipment, telecommunications infrastructure, ports, rail networks and other infrastructure assets. Licences that exploit land (forestry, agricultural and certain water licences) will also be captured, as may certain data centre arrangements and securitised licence public private partnership (PPP) structures.

The explanatory materials state that the definition isn’t intended to capture an ancillary licence to access premises for the performance of on-site services, although the legislative basis for that limitation isn’t entirely clear from the drafting.

Retrospective application to 12 December 2006

A notable feature of the reforms is the retrospective application of significant elements of the expanded ‘real property’ definition to CGT events occurring on or after 12 December 2006, being the date on which Division 855 commenced.

The retrospective limbs are narrower than the prospective definition. They apply to:

• Any interest in or right over Australian land, regardless of treatment under state or territory law
• A thing, or combination of things, fixed (not merely installed) on Australian land that is, or is reasonably expected to be, situated on the land for the majority of its useful life, regardless of fixture treatment
• A lease of such a thing.

The retrospective amendments don’t extend to personal call rights, licences or contractual rights over land, or to things installed but not fixed.

The policy justification advanced in the explanatory materials is that Division 855 was always intended to operate by reference to the nature of the asset rather than its characterisation under state or territory severance laws. That justification is difficult to reconcile with the original explanatory memorandum to the Tax Laws Amendment (2006 Measures No. 4) Bill 2006, which expressly stated that TARP refers to real property “within the ordinary meaning of that term”, and with the recent decisions in YTL and Newmont. It also overlooks the fact that retrospective application captures items which aren’t, and never were, fixtures at general law and which retain their character as chattels.

Critically, foreign residents who disposed of relevant assets historically may not have lodged Australian tax returns on the basis that no Australian tax was payable under the law, as then understood; and so will not have triggered the standard four-year amendment period. The Australian Taxation Office (ATO) may therefore, in principle, issue assessments in respect of transactions executed many years ago.

For private wealth advisers, the immediate consequence is the need to review historic disposals by non-resident clients of Australian assets that, under the proposed retrospective rules, may now be characterised as TARP or as underlying TARP for IARPI purposes.

Tax treaty override

The exposure draft amends subsection 3(5) of the International Tax Agreements Act 1953 so that, for treaty purposes, the expressions ‘real property’, ‘immovable property’ and ‘land’ mean TARP within the meaning of the ITAA 97. This override is necessary if the expanded domestic TARP definition is to operate consistently with Australia’s treaty network, given the judicial confirmation that those terms in the treaties take their Australian general law meaning.

The override applies in relation to CGT events occurring on or after the commencement date. Treaty partners may take issue with the unilateral expansion of Australia’s source taxing rights, although recent Australian precedent (including the override relating to state foreign purchaser surcharges and the permissibility of historical override in Commissioner of Taxation v Lamesa Holdings BV [1997]) suggests that significant diplomatic pushback is unlikely.

Changes to the principal asset test

The PAT determines whether a non-portfolio membership interest is an IARPI. Two changes are proposed:

1. The PAT is amended from a point-in-time test (applied just before the CGT event) to a test that is satisfied if more than 50 per cent of the underlying entity’s market value is attributable to TARP at any time during the 365-day period preceding the CGT event. This aligns Australia’s approach with the OECD Model Tax Convention and Multilateral Instrument and is intended to address pre-disposal asset stripping
2. The value of mining, quarrying or prospecting information (MQPI), while not itself TARP, is to be treated as TARP for PAT purposes. This reflects the commercial reality that MQPI and the related mining, quarrying or prospecting rights are typically valued together and reflects the Full Federal Court’s reasoning in Commissioner of Taxation v Resource Capital Fund III LP [2014].

The 365-day test will impose a material valuation and compliance burden on entities whose TARP and non-TARP values are closely balanced, with daily monitoring potentially required to determine the position on any given day. Valuation disputes are likely to increase in both frequency and cost.

Foreign resident CGT withholding: notification regime

Australia’s foreign resident CGT withholding regime currently obliges purchasers of certain assets to withhold 15 per cent of the purchase price and remit it to the ATO, unless the vendor provides a declaration that the asset isn’t an IARPI. Under current law, a purchaser may rely on that declaration unless it actually knows the declaration to be false.

The exposure draft introduces a new notification regime for transactions where the aggregated market value (including related transactions, the scope of which isn’t defined) is AUD 50m or more. In broad terms:

• The vendor must notify the ATO, in the approved form, that it intends to make or has made a non-IARPI declaration
• Where the period from contract to completion exceeds 31 days, the notice must be given at least 28 days before the end of that period. For shorter periods, it must be given before, or as soon as reasonably practicable after, the start of that period and, in any event, before completion. This accommodates simultaneous signing and completion
• The vendor must declare to the purchaser that the ATO has been notified and identify the date of notification
• A purchaser may only rely on the declaration if the vendor has complied with these requirements and if, at no time during the period from receipt of the declaration to acquisition of the asset, the purchaser knows, or could reasonably be expected to know, the declaration to be false.

The shift from a subjective to an objective knowledge standard is a significant change. Purchasers will need to undertake and document proportionate due diligence (including searches of the register published by the Australian Securities and Investments Commission and the Australian Business Registrar, transaction documents and residency disclosures) and address obvious inconsistencies. Continuous monitoring through to completion will be required, which is particularly relevant given the 365-day PAT.

Transaction timetables and documentation will need to accommodate the notification mechanics and warranties and indemnities should be reviewed.

The renewable energy concession

In recognition of the impact of these changes on foreign investment in the Australian renewable energy sector, and in support of Australia’s energy transition objectives, the government is introducing a transitional 50 per cent CGT discount for qualifying foreign investors.

The principal features are:

• Available only to foreign residents that aren’t individuals, including corporate entities and trustees of foreign trusts to the extent they are taxed in that capacity
• Applies to CGT events occurring from commencement until 30 June 2030
• Operates independently of Subdivision 115-A of the ITAA 97, so that the standard 12 month holding period requirement to qualify for the discount doesn’t apply.

For direct disposals, the relevant asset must be an ‘Australian renewable energy asset’, being TARP whose primary purpose is to generate, or directly facilitate the generation of, electricity in Australia using an eligible renewable energy source within the meaning of the Renewable Energy (Electricity) Act 2000, which excludes fossil fuels and derived materials. ‘Primary purpose’ means predominant use, that is, use for renewable generation greater than for any other purpose.

Pre-development and development-stage assets may qualify where the surrounding circumstances objectively demonstrate that intended use is limited to renewable electricity generation. Treasury identifies relevant evidence as including land identified for the project, grid connection agreements, development approvals and offtake agreements. Grid-firming battery energy storage systems essential to renewable generation are within scope, while standalone battery energy storage systems and general transmission infrastructure (poles and wires) are not.

For indirect disposals, the membership interest must be an IARPI that passes a separate ‘renewable energy asset test’.  That test, applied at a point in time (not over the 365 day window), requires the market value of the test entity’s Australian renewable energy assets to be at least nine times the market value of its other TARP. In other words, at least 90 per cent of the relevant TARP value must be attributable to renewable energy assets. Specific look-through, integrity and anti-double-counting rules apply, including provision to disregard duplicated assets within a corporate group and assets acquired for the non-incidental purpose of satisfying the test.

The concession provides partial relief, but its practical reach is limited. The sunset date means that newly initiated projects are unlikely to benefit, as most renewable projects will not be exited by 30 June 2030. Holders of existing projects who do exit in time will obtain the discount only where the 90 per cent threshold is satisfied, which may be problematic for integrated generation and storage projects or projects with significant transmission infrastructure.

The discount doesn’t apply to CGT events that occurred before commencement, despite the retrospective application of the expanded TARP definition.

Considerations for private clients and private wealth in Europe and Asia-Pacific

The reforms have a number of implications that should be addressed proactively:

• Historic exposures: foreign resident clients who have disposed of Australian assets since 12 December 2006 should review whether any such disposals could, under the retrospectively expanded definition, give rise to Australian CGT liability. Treaty-protected disposals will generally be unaffected, but residents of non-treaty jurisdictions are exposed. Affected clients should also assess whether voluntary disclosure or other engagement with the ATO is appropriate
• Existing investments: there are no general grandfathering provisions. Foreign clients holding Australian land-adjacent assets (renewable energy, infrastructure, resources, data centres, agricultural and forestry rights and water entitlements) should reassess the tax consequences of an eventual disposal. Carrying values, investment models and exit strategies may need to be revisited, including the impact on the pool of potential buyers (and consequent valuation effects) of bringing previously non-TARP assets into the regime
• Structuring of new investments: notwithstanding the renewable energy discount, the overall direction of the reforms is to broaden the base and reduce structuring optionality. Investment structures should be designed on the assumption that economic exposure to Australian land or natural resources will be subject to Australian CGT on exit, and the interaction with managed investment trust (MIT) rules and other concessional regimes (which haven’t been correspondingly expanded) should be carefully modelled. An asymmetry may arise where exit gains are taxed but MIT concessional withholding on income distributions isn’t available
• Transaction execution: the new withholding notification regime, the 365-day PAT and the objective knowledge standard for purchasers will increase transaction complexity, timetable risk and documentation requirements. Cross-border M&A advisers should update template provisions accordingly
• Treaty position: for clients resident in treaty jurisdictions, the treaty override and its non-retrospective operation should be considered carefully. Holding structures may need to be reviewed to ensure that treaty protection remains available and effective.

Conclusion

The exposure draft represents the most significant expansion of Australia’s foreign resident CGT base since Division 855 was enacted in 2006. The policy direction is consistent with international trends and the OECD Model Tax Convention. However, the retrospective application to 2006, the limited scope of the renewable energy concession and the absence of grandfathering each warrant careful analysis by international investors and their advisers.

Consultation on the exposure draft closed on 24 April 2026 and bills introduced to parliament following the 2026-27 Federal Budget on 12 May 2026. Private clients with historic or prospective Australian exposures should be obtaining specialist Australian tax advice immediately.