Updates to Australia's non-resident capital gains tax regime – shifting goal posts 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, concluding on 24 April 2026, leaves little time for interested parties to make meaningful comments. 

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 to provide that the terms “real property” and “immovable property” in those tax treaties means TARP. 

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) which 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?

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, which, as a matter of law, arguably do not fall within the scope of the rules, do fall within the scope of the rules. 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 seeking to dispose of their interests in affected assets (or those who have already done so) should carefully review the new provisions. 

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]}