Foreign Resident CGT Overhauled: Twenty Years in the Crosshairs

When Treasury consulted on changes to Australia's foreign resident capital gains tax regime in July 2024, the proposal was framed as a clarification. The draft legislation released on 10 April 2026 is a different matter entirely.

The consultation window closes on 24 April 2026. Here is what has changed, and what it means.

The Regime, Briefly

Australia's foreign resident capital gains tax (CGT) rules tax non-residents on gains from three categories of asset:

1. taxable Australian real property (TARP),

2. indirect Australian real property interests (IARPIs), being shares or units in entities whose value is predominantly derived from Australian real property), and

3. assets used in an Australian permanent establishment.

The first change in this reform cycle is already law. Since 1 January 2025, the foreign resident CGT withholding rate increased from 12.5% to 15%, and the previous $750,000 threshold below which withholding did not apply was removed entirely. Australian resident vendors now need an ATO clearance certificate before settlement or face 15% withholding on the full sale price.

What the Draft Legislation Proposes

A new definition of real property

This is the most significant change. "Real property" has never been defined in Australia's income tax law. Courts have consistently held that it takes its general law meaning, turning on whether an asset is a legal fixture. The ATO tested that position twice in the Federal Court in 2025. In YTL Power Investments [2025] FCA 1317, the Court held that electricity transmission infrastructure was not real property. In Newmont Canada [2025] FCA 1356, it reached the same conclusion for mining plant and equipment. The ATO lost both cases.

The draft legislation responds by replacing the general law test with a statutory definition. Real property will now include any interest in or right over land, licences and contractual rights exercisable over land, and anything fixed or installed on land that is expected to remain there for the majority of its useful life, whether or not it is a fixture at general law. State and territory severance laws, which can treat fixed assets as chattels for local purposes, are to be expressly disregarded.

In practice that captures wind turbines, solar panels, battery storage systems, transmission lines, substations, rail networks, ports, airports, mining drills, and heavy machinery. It also captures water entitlements, pastoral leases, and options to acquire any of the above. The Government says it is enshrining the original intention of the law. The profession broadly disagrees.

A 365-day principal asset test

The principal asset test determines whether shares or units in an entity are IARPIs and therefore subject to CGT on disposal. Currently it is applied at a single point in time: the moment of the transaction. If more than 50% of the entity's underlying value is TARP at that moment, the interest is taxable.

The draft extends the test across the 365 days prior to a CGT event. An interest will be an IARPI if the threshold was crossed at any point during that year. This creates real compliance complexity and real cost. Foreign investors will need to monitor and document TARP exposure continuously rather than at a single point in time.

ATO notification before settlement

For transactions of $50 million or more where a vendor declares that an interest is not an IARPI, the vendor must now notify the ATO of that declaration before completion. A declaration is invalid without that notification. Purchasers can no longer receive a declaration and rely on it passively. They must verify that the ATO has been notified.

The knowledge standard has also shifted. Under current law, a purchaser can rely on a declaration unless they actually know it to be false. Under the proposed law, reliance is unavailable if the purchaser knew, or reasonably ought to have known, that the declaration was false. Active due diligence on vendor declarations is now expected, not optional. Penalties for non-compliance with withholding obligations start at $7.5 million on a minimum-threshold transaction.

The Retrospectivity Problem

Key aspects of the new real property definition will apply to CGT events occurring on or after 12 December 2006, the date Division 855 of the ITAA 1997 first came into effect. That is nearly twenty years of retrospective reach.

The consequence is serious. Foreign investors who sold assets between 2006 and today without paying Australian CGT, on the reasonable basis that their assets were not TARP under the law as it stood, may not have lodged Australian tax returns for those transactions. Without a lodged return, the usual four-year amendment period does not run. The ATO could seek to assess those investors on transactions that, at the time, attracted no Australian tax liability at all.

Australia has a network of double tax agreements signed with individual countries, and those agreements may provide some shelter. The proposed override to those agreements, which would realign references to "real property" and "immovable property" with the new domestic definition, does not itself operate retrospectively. Investors resident in countries that have a double tax agreement with Australia may therefore retain some historical protection. For investors in non-agreement jurisdictions, the protection may be more limited.

A Concession for Renewables, With Strings Attached

The draft includes a transitional 50% CGT discount for foreign residents disposing of qualifying renewable energy assets, available for CGT events occurring after commencement and before 1 July 2030.

For direct disposals, the asset must have the primary purpose of generating, or directly facilitating the generation of, renewable electricity. For indirect disposals through a corporate or trust vehicle, at least 90% of the entity's underlying TARP must consist of qualifying renewable energy assets at the time of sale. General transmission infrastructure will not qualify. Standalone battery storage may qualify where it is essential to generation, but the position is not yet settled.

The concession is a genuine acknowledgment of the policy tension between taxing foreign investment and attracting capital into Australia's clean energy transition. It is also narrow. It does not apply to historical disposals caught by the retrospective provisions, and it will not drive new investment in projects that are unlikely to be exited before 2030.

What This Means for You

The consultation period is short and the profession is expected to push back strongly, particularly on retrospectivity. The final legislation may look different from what has been released. Regardless, there are steps worth taking now.

If you are a foreign investor holding Australian real property, infrastructure or energy assets, review whether your existing holdings will be classified as TARP under the new definition and model the CGT exposure on exit. There is no grandfathering for assets already held.

If you have previously sold Australian assets and did not pay CGT on the sale, seek advice on whether those transactions fall within the retrospective scope. The window stretches back to 2006.

If you are acquiring Australian assets from a foreign vendor, particularly in the infrastructure, energy or resources sectors, your due diligence obligations have increased. Vendor declarations can no longer simply be received and filed. They need to be actively assessed.

If you are involved in transactions at or above $50 million, build ATO notification into the transaction timetable from the outset.

If you hold renewable energy assets and are weighing a sale, the 2030 deadline for the transitional concession is worth factoring into your timing now.

Please contact our people below on how this may impact you.

Eollyn Cortes  0478 727 395

Sagang Chung 0431 435 333

Helen Jeon  0457 811 882