Foreign resident capital gains tax reforms – data centre considerations for foreign investors

Following Treasury’s recent release of exposure draft legislation (the ED), non-resident investors now have a clearer picture of the significant changes to Australia’s capital gains tax (CGT) regime, which were foreshadowed in the 2024-25 Federal Budget. It is apparent that the Government intends to go beyond what was originally foreshadowed, with a key feature of the ED being its partial retrospectivity. 

The consultation period, which concluded on 24 April 2026, left little time for interested parties to make meaningful comments. As taxpayers across various industries which have a connection with Australian real property absorb the impact of the proposed changes, this article explores some of the data centre related considerations which may be of particular significance to foreign investors.

Australia’s current regime for taxing non-resident capital gains

Under Australia’s current regime, foreign residents are potentially taxed under the CGT provisions to the extent that they are disposing of ‘Taxable Australian Property’ (TAP). TAP includes:

• Taxable Australian Real Property (TARP) – this is defined as ‘real property’ situated in Australia or mining, quarrying or prospecting rights for natural resources located in Australia; and
• Indirect Australian Real Property Interests (IARPI) – this is, in broad terms, a 10 per cent or greater interest (at the time of the taxing event or throughout a 12-month period in the two years before that time) in a company where more than 50 per cent of the market value of the company’s assets consist of TARP at the time of the taxing event. 

These rules are supported by the Australian CGT withholding rules (FRCGT). Under those rules, purchasers are, in broad terms, required to pay 15 per cent of the purchase price (typically withheld by the purchaser from the purchase price) to the Australian Taxation Office (ATO) from the sale of certain assets which are potentially TAP (including IARPI such as shares). However, the purchaser is not required to pay this amount to the ATO if, in the case of IARPI, they are provided with a written declaration that the relevant CGT assets are, for the requisite period, not IARPI (Not IARPI Vendor Declaration) or that the relevant vendor is an Australian resident. 

What is the intention of the new rules?

The new rules seek to: 

• expand Australia’s tax base regarding capital gains derived by foreign residents;
• create a new reporting regime for foreign residents disposing of their interests in Australian assets; and
• introduce a temporary 50 per cent discount on the disposal of qualifying direct and indirect interests in Australian renewable energy assets by foreign residents. 

Updated definitions of ‘TARP’ and ‘real property’ 

The proposed changes will expand the definition of ‘TARP’ to include:

• water entitlements in relation to a water resource situated in Australia; and
• an option or right to acquire a CGT asset that is TARP.

Where the current definition of TARP also includes ‘real property situated in Australia’, the proposed changes will expand this to include real property that:

• is situated in Australia;
• relates to land situated in Australia; or
• relates to a thing fixed or installed on land situated in Australia.

The concept of ‘real property’ will also be specifically defined. Where the current regime applies, the ordinary meaning of the term ‘real property’, the new statutory definition, which is drafted inclusively, appears to expand considerably the concept of real property. Under the proposed new definition, the term “real property” not only includes everything covered by its ordinary meaning, but also specifically includes:

• any interest or right over land;
• 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) that is fixed or installed on land that is, or expected to be, fixed or situated on the land for the majority of its useful life; and
• a lease of a thing, or a licence or contractual right exercisable over a thing mentioned in the dot point above.

These proposed changes will also be applied to the interpretation of Australia’s existing tax treaties by way of an amendment to the International Tax Agreements Act 1953 (Cth) to provide that the terms “real property” and “immovable property” in those tax treaties means TARP. 

Data centre related observations

Data centre owners

The interests in an entity which legally and beneficially owns a data centre, including the land on which it is located, would probably pass the principal asset test (PAT), even under the existing rules (where the majority of the asset value relates to the land and its fixtures). As such, we would not anticipate a fundamentally different FRCGT outcome under the proposed rules compared to the existing rules, for a foreign investor holding shares or units in a data centre owning entity with that kind of asset valuation profile.

That said, to the extent that valuation arguments could support that some value is attributable to non-real property assets (as characterised under the existing rules), we would expect that the broadening of the “Real Property” definition would have the effect of ensuring that assets which are “installed” on the land (even if not a fixture) would fall within the definition of “Real Property”.

Data centre customers

The broadening of the “Real Property” definition encapsulates a broader range of commercial arrangements than what would be captured by the existing rules. In example 1.1 of the explanatory memorandum to the proposed rules (the EM), the following fact pattern is provided:

Y is an IT services company that has entered into an agreement with Z, the owner of a data centre building located in Sydney. The agreement is described as a “licence agreement” and grants Y access to certain space in the building to house its servers. Personnel from Y are permitted to enter the data centre for the purpose of accessing and maintaining those servers. Y’s rights of access under the agreement fall within the meaning of real property.

The above example raises an interesting technical question but, ultimately, even if the licence agreement is caught by the new definition for “Real Property”, it will be necessary to ascribe a value to the licence agreement in the hands of “Y”. If, for example, the licence agreement has been struck on arm’s length terms and pricing which is not especially favourable to Y in light of current market pricing conditions, query whether a valuer would ascribe significant value to that agreement. So, while the arrangement is caught by the new definition for “Real Property”, the practical implications of the “Real Property” characterisation will be determined by the valuers. Presumably if the IT Services company owns the servers, they too may fall within the “Real Property” definition as they may reasonably be expected to be situated on the land for the majority of their useful life (again, the valuation of these servers will be relevant to determining the practical PAT impact).

In contrast to the licence agreement example referred to in the EM, there are other access arrangements that arguably fall outside the scope of the new “Real Property” definition. This includes certain “as‑a‑Service” offerings, commonly categorised as Infrastructure‑as‑a‑Service (IaaS), Platform‑as‑a‑Service (PaaS) and Software‑as‑a‑Service (SaaS), where the connection to real property generally diminishes the further up the technology stack one goes.

By way of example, Graphics Processing Units as a Service (GPUaaS) is a cloud‑based computing model under which providers offer on‑demand access to high‑performance computing chips over the internet. GPUaaS enables businesses and individuals to access advanced computing capability without purchasing, installing or operating physical hardware themselves. Instead, customers pay a third‑party provider for processing capacity, typically on a usage basis.

Commercial arrangements for GPUaaS generally fall within one of two models:

1. Dedicated GPU, where the customer has exclusive use of an individual GPU; or
2. Virtual GPU, where the customer has on‑demand access to GPU capacity shared among multiple users.

The GPUaaS model is inherently consumption‑based, akin to the provision of utilities such as electricity or telecommunications services. Charges are typically structured on a pay‑as‑you‑go, subscription or reserved‑instance basis, depending on the agreed commercial terms.

Critically, the customer acquires no ownership interest in, and no right to possess or control, the underlying hardware. The contractual relationship is governed by a service agreement, rather than a lease or licence. What the customer receives is a right to utilise computing capacity, not a right to occupy or control physical space – unlike, for example, a colocation arrangement.

To fall within the new definition of “Real Property”, the arrangement (if not a lease or licence) would need to give rise to a “contractual right exercisable over a thing” fixed or installed on land. While the precise contractual terms would need to be considered, on a literal reading of the ED, it is not clear that the GPUaaS model in all instances constitutes a contractual right exercisable over something installed or fixed on land. It would seem that if there is a risk of a “Real Property” characterisation, the greatest risk would relate to “Dedicated GPU” offerings, given the commercial arrangement guarantees access to a particular GPU or a particular server.

To the extent that there were GPUaaS contractual rights held by the customer which fell within the revised definition for “Real Property”, those contractual rights may not have a material value assuming that continuing access to the service depends upon the customer paying what are arm’s length payments at the prevailing market price.

The impact of the proposed FRCGT rules on specific data centre arrangements will require careful consideration. The interpretation of the words “contractual right exercisable over a thing” will no doubt be scrutinised by taxpayers and the Australian Taxation Office alike, with the latter likely taking an expansive view of what it encapsulates. That said, if the arrangements are in substance the provision of a service without the customer being able to exercise control over the underlying physical equipment, it would seem arguable that the arrangement should not fall within the revised definition of “Real Property”.

Constitutional inconsistency

The definition of “real property” in the ED creates a potential definitional inconsistency between State and Commonwealth law where an asset is a chattel for state law purposes but a fixture for Commonwealth income tax purposes. While there are constitutional protections prohibiting an inconsistency between State and Commonwealth law, the prohibition is only enlivened in certain circumstances, such as where the Commonwealth law has the potential to significantly impair, curtail or weaken the capacity of the States to exercise their constitutional powers and functions (confirmed recently by the High Court[1]). It is unlikely that the definitional inconsistency between the State and Commonwealth proposed amendments will engage the constitutional prohibition. 

Retrospectivity

Certain aspects of the updated definition of ‘real property’ will be backdated to 2006, when the current foreign resident CGT regime was introduced. This will alarm foreign investors, given its potential to affect transactions (including internal restructuring transactions) that have already completed. The fairness of new laws that affect taxpayers who made investment decisions based on laws as they stood and with no indication that they would be impacted by retrospective changes will be a key topic of conversation, particularly because unless a foreign resident vendor has filed an income tax return for the relevant year (which seems unlikely), the ATO’s ability to review and assess that vendor on a historical transaction may not be subject to any limitation periods. While Treasury will likely be urged to remove the retrospective features of the ED in the final legislation, it remains to be seen whether such calls will be heeded. 

Expanded scope of IARPI

The draft legislation also proposes to expand the scope of IARPI. This is done indirectly by the expansion of TARP, as outlined above and also as follows: 

• the changes propose to treat mining, quarrying and prospecting information as TARP in calculating whether transactions involve the disposal of IARPI.
• where the current test for IARPI considers a target company’s asset composition on the date of the taxing event, the proposed changes apply the test over a 365-day period prior to the date of the taxing event. If more than 50 per cent of a target company’s assets consist of TARP at any time in this period, the acquired interest will be deemed IARPI.

This change in particular represents an onerous compliance burden for taxpayers to prove that at no time (even momentarily) the greater than 50 per cent test is breached. Failure to discharge this proof would mean that 100 per cent of the gain would be taxed. This rule also raises questions of fairness in situations where say, an Australian target company sells its sole real property asset during the 365-day period and has paid Australian tax on the resultant capital gain. It may also potentially complicate pre-transaction restructuring. In that case, Australian tax has already been paid on the sale of real property but, under the ED, the non-resident vendor of the Target Company could still be caught by the rules. 

Introduction of compulsory notification framework

The ED proposes to alter the requirements for when a purchaser is able to rely on a “Not IARPI Vendor Declaration” to not withhold a part of the purchase price from the vendor. 

First, where the aggregated value of the transaction and any related transaction is A$50 million or more, the vendor must have notified the Commissioner of the transaction within prescribed timeframes. Parties to transactions with values near this A$50 million threshold will need to take care to ensure that this notification requirement will be met, if and when required (for example, where the purchase price is not in Australian currency), to avoid potential delays to completion. 

The changes also place a higher burden on the purchaser to assess whether a Not IARPI Vendor Declaration or vendor residency declaration is false. Previously, a declaration would only be invalid if the purchaser had actual knowledge that the declaration was false. Under the proposed regime, a purchaser will not be able to rely on a vendor declaration if the purchaser could reasonably be expected to know that the declaration was false, which is an objective test. 

Both of these proposed changes necessarily increase the level of due diligence required by the purchaser on the vendor’s compliance and will require a reworking of existing precedents. The already cumbersome and inconsistent approaches seen in the market in public M&A transactions will become even more complex under the new rules.

50 per cent CGT discount for investors in renewable energy projects

Treasury also plans on introducing a temporary 50 per cent CGT discount for foreign investors, excluding individual investors, who dispose of either:

• an Australian renewable energy asset; or
• a membership interest where at least 90 per cent of the market value of the entity’s TARP assets is attributable to Australian renewable energy assets.

A renewable energy asset is TARP that has the primary purpose of generating (or directly facilitating the generation of) electricity using an eligible renewable energy source. The discount only applies during a transitional period concluding in 2030.

While the other changes arguably cut across efforts to achieve net zero targets through foreign investment, the discount provides some relief and in turn, seeks to promote the growth of Australia’s renewable energy infrastructure. However, the extent of relief provided is limited by the scheme’s expiry in 2030, as well as the relatively high 90 per cent asset threshold applied. Given investment horizons for these types of assets typically exceed four years, it seems likely that the Federal Government will need to extend the expiry date if it is to provide meaningful support for foreign investment into renewable energy infrastructure projects leading Australia’s transition to renewable energy. 

It should however be stated that, but for the proposed changes in the ED, this ‘’concession” may not have been necessary.  

What does this mean for foreign investors in the data centre sector? 

Treasury has stated that since the introduction of the regime, the practical interpretation of TARP has not been in line with the legislature’s intended scope. As such, these amendments are purportedly aimed at clarifying the meaning of ‘TARP’ and realigning its interpretation with the original legislative intention in place when the foreign resident CGT regime was introduced in 2006. Despite this, the proposals evidently expand the scope of the CGT regime and have more far-reaching consequences than stated. 

In our experience, the ATO has frequently taken a maximalist approach to the definition of IARPI and TARP, taking the position that exits are subject to tax under the Australian CGT rules when, as a matter of law, they arguably are not subject to tax. Through the FIRB process, FRCGT disclosures and through scrutinising news articles, the ATO is becoming quickly aware of impending exits and, in some instances demanding surety over asserted CGT liabilities, including through escrow arrangements (to further support the FRCGT process). 

In an apparent attempt to align the law with its practical interpretation by the ATO, the proposed changes will bring a wider range of transactions within the ambit of Australia’s CGT regime and impose higher compliance burdens on foreign investors. They also have the potential to affect past taxing events occurring from 12 December 2006. Foreign investors in the data centre sector, whether as owners, operators or customers, should carefully review the new provisions and seek advice on how the expanded definitions may apply to their specific arrangements.

Our Tax team would be pleased to advise on the ED and on how you can navigate the proposed changes, including the making of any submissions.

^{[1] G Global 120E T2 Pty Ltd v Commissioner of State Revenue [2025] HCA 39 at [94].}