Draft reforms materially widen Australia’s ability to tax foreign investors on capital gains, expanding what qualifies as taxable Australian real property, tightening the principal asset test, and applying parts of the changes retrospectively back to 2006.
Foreign resident CGT withholding rules are set to become more prescriptive and risk‑heavy for large deals, introducing mandatory ATO notifications, stricter buyer due‑diligence expectations, and greater exposure for purchasers where declarations are incorrect or incomplete.
A separate exposure draft introduces a time‑limited 50% CGT discount for certain foreign investments in renewable energy assets, with complex eligibility thresholds for indirect interests and practical implications for energy, infrastructure and storage projects.
On 10 April 2026, the Australian Government released Exposure Draft (ED) rules to strengthen how Australia’s foreign resident Capital Gains Tax (CGT) applies to foreign residents, and to give effect to the Government’s related 2024-25 Budget announcement.
The ED includes measures which:
Introduce a tax law definition of ‘real property’ which expands the general legal meaning for income tax purposes, including for Division 855 taxable Australian real property (TARP) purposes, which apply retrospectively in three instances (interests in land, fixtures and leases over land and fixtures) on or after 12 December 2006.
Revise the Principal Assets Test (PAT) from a point in time test to a preceding 365 days test.
For transactions of AUD$50m or more, if a Vendor chooses to make a non-Indirect Australian Real Property Interest (IARPI) declaration, the Vendor has to notify the Australian Taxation Office (ATO) and the buyer can only rely on this declaration if the buyer does not know, or cannot be reasonably expected to know, that the declaration is false.
Align Australia’s tax treaties to reflect the ED definition of TARP.
A separate Australian renewable energy asset ED also provides a temporary CGT discount of 50 per cent up to 30 June 2030 for foreign investors in Australian renewable energy assets.
Background
Under Division 855 of the Income Tax Assessment Act 1997, foreign residents can disregard a capital gain or loss from a CGT event unless that CGT asset is ‘taxable Australian property’ (TAP) – which includes direct interests in TARP and IARPI.
Since Division 855 was introduced in December 2006, the ATO has faced some challenges in enforcing these rules due to the general legal definition of ‘real property’ including under State and Territory laws. These challenges are reflected in the ED’s Explanatory Memorandum (EM) which highlights judicial decisions that purportedly identified a gap between the intended and actual operation of Division 855 due to the perceived restrictive definition of ‘real property’ at general law.
In particular, the ATO recently lost two cases involving the meaning of ‘real property’ in YTL Power Investments Limited v Commissioner of Taxation [2025] FCA 1317 (YTL) and in Newmont Canada FN Holdings ULC v Commissioner of Taxation (No 2) [2025] FCA 1356 (Newmont). YTL is actively being appealed (with an appeal in Newmont also possible) – further information is available here: YTL and Newmont.
Broader and clearer definition of TARP
The ED introduces a tax law definition of ‘real property’ as follows:
Any interest in or right over land (regardless of how that interest or right is treated for the purposes of any 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) that is fixed or installed on land and is, or is reasonably expected to be, situated on the land for the majority of its useful life (whether or not it is a fixture at general law)
A lease, licence or contractual right exercisable over a thing as above
A water entitlement in relation to a water resource situated in Australia
An option or right to acquire the above, and
For indirect disposals only, mining, quarrying or prospecting information will be deemed to be TARP for the purposes of the PAT.
Importantly, the ED provides that State and Territory severance provisions are to be expressly disregarded for Division 855 purposes.
In addition, the scope of TARP has been expanded to specifically include water entitlements (and related water rights), and options or rights to acquire such TARP assets. The ED’s EM clarifies that item (4) above will include “utilities infrastructures, transmission lines, substations, wind turbines, solar panels, large scale battery storage systems (BESS) and heavy machinery installed on land”. While these changes provide additional certainty, especially for renewable energy assets, they will have a significant impact on non-residents and future foreign investment in Australia.
Strengthened indirect CGT rules – Principal Asset Test (PAT)
The PAT determines that an interest is an IARPI if more than 50 per cent of the value of the entity’s assets are attributable to TARP.
Under the ED:
The testing period will be expanded from the day of the CGT event to 365 days before the day of the CGT event.
Mining, quarrying and prospecting information must now also be included in the calculation of TARP assets.
This change aligns the PAT with the OECD, and is an integrity measure aimed at reducing the ability for foreign investors to alter the composition of their assets prior to a sale to avoid CGT. However, it does present challenges (and additional compliance costs and uncertainties) to both vendors and purchasers going forward in demonstrating that the 50 per cent has not been exceeded at any time within that 365 days test period.
Retrospective application – historical transactions may be caught
Three key elements (definition of interest in land, fixtures and leases over land and fixtures) of the expanded definition of ‘real property’ are set to apply retrospectively to CGT events from 12 December 2006 (i.e. when Division 855 was first enacted).
The Government’s position is that these assets were always intended to be taxable, and these changes merely clarify that intent. Historic transactions may therefore be reassessed under the amended changes.
However, the scope of the retrospective application is narrower than the prospective rules. For the period from 12 December 2006 to the commencement of the new legislation, the definition of real property is limited to things that are ‘fixed to’ land (compared to the prospective definition, which also includes things ‘installed on’ land). Further, it is more limited in relation to licences and contractual rights.
It is also worth noting that foreign investors generally would not have lodged Australian tax returns in the past, and therefore the typical four-year ATO review period limitation would not apply. The proposed changes would therefore technically enable the ATO to assess the foreign investor on transactions going as far back as 12 December 2006.
Treaty alignment changes (discussed below) are not proposed to operate retrospectively, meaning the retrospectivity of these changes may be further limited.
Nevertheless, we expect the ATO to use these changes to assess a number of foreign taxpayers who did not lodge Australian tax returns and potentially Australian buyers of assets from foreign resident vendors who did not withhold FRCGWHT where they may have had to due to these changes on past transactions, including transactions that may have been or are currently being litigated.
New ATO notification obligations – Foreign Resident Capital Gains Withholding Tax (FRCGWHT)
Currently, a vendor may provide a non-IARPI declaration to a purchaser to avoid incurring FRCGTWHT. There is no requirement to notify the ATO.
For transactions valued $50 million or more, there are now additional requirements as set out below:
The vendor will be required to notify the ATO that they are giving such a declaration to the purchaser within a specified period, which begins when the contract is entered into (at signing) and ends immediately before the purchaser becomes the owner of the CGT asset (and, for periods of 31 days or fewer, the notification may be given before the period begins – i.e. before signing – to accommodate simultaneous signing and completion).
The aggregated market value of a transaction will be assessed by reference to the value of any ‘related transactions’.
The vendor must notify the purchaser that the vendor has notified the ATO, and when that occurred.
The purchaser is only able to rely on the declaration if:
they do not know it to be false, and could not reasonably be expected to know it was false. This is a significant policy shift for purchasers who will now be expected to conduct active due diligence to satisfy the objective knowledge test rather than rely passively on vendor declarations, as they are able to do under the current law;
the vendor has in fact notified the ATO, as required; and
the vendor has notified the purchaser that the vendor has notified the ATO.
Failure of the vendor’s notification requirements to the ATO means that the purchaser must apply foreign resident CGT withholding and remit the amount to the ATO.
The proposed process is far more prescriptive than under the current law, and significantly increases the compliance burden, risk, and transaction diligence for large deals as well as the visibility on large transactions.
Treaty alignment
Tax treaties will be amended so that ‘real property’, ‘land’ and ‘immovable property’ align with Australia’s TARP definition. This amendment reflects the Government’s stated objective of aligning Australia’s taxing rights more closely with the OECD Model, while reducing scope for treaty-based characterisation arguments that diverge from domestic law. Unlike the changes to the definition of TARP, this change will not apply retrospectively.
Renewable energy assets ED – transitional CGT discount for foreign residents (non-individuals)
A separate ED introduces a transitional 50 per cent CGT discount for foreign residents (including companies) and trustees of foreign trusts disposing of renewable energy assets in Division 855, separate to the Australian resident CGT discount in subdivision 115-A ITAA 1997.
Eligible taxpayers: Typically foreign entities other than individuals (e.g. companies, trustees of foreign trusts). This reflects the policy intent to target institutional and infrastructure-scale investment, rather than retail or private investors. It appears that trustees of foreign trusts (including trustees which are individuals) which have individual beneficiaries may be entitled to the CGT discount, notwithstanding that foreign resident individuals may not directly benefit from the discount.
Timing: The discount applies only where:
The CGT event occurs on or after the commencement of the amending Act, and
The CGT event occurs before 1 July 2030.
The CGT discount only applies to CGT events which occur after the enactment of the change, unlike the retrospective application of the above Division 855 real property definition changes.
Eligible assets: To qualify for the discount, the assets must have a primary purpose of generating, or directly facilitating the generation of, electricity in Australia using an eligible renewable energy source (as defined in the Renewable Energy (Electricity) Act 2000).
The ‘primary purpose’ test is applied objectively. The EM clarifies that assets may qualify even if:
Construction is incomplete
Generation has not yet commenced, or
The asset is temporarily dormant.
The EM provides that pre-development and development stage renewable energy assets are eligible, provided there is objective evidence supporting their intended purpose. This definition could be problematic for standalone battery energy storage solution (BESS) projects, noting however the EM indicates that grid firming battery energy storage systems may be eligible.
Indirect interests: Where the renewable energy project is held in an Australian entity and not directly by a non-resident (which occurs in most cases), the discount will only apply where, at the time of sale, 90 per cent (by value) of the entity’s TARP assets are renewable energy assets. Again, this could be an issue for BESS assets along with general transmission assets (poles and wires) held which may skew the 90 per cent test.
Commencement
Both the above EDs (i.e. for the TARP and renewable energy asset measures) are proposed to commence in respect of CGT events that happen on the earliest occurring 1 January, 1 April, 1 July, or 1 October after the legislation receives Royal Assent. The 2025-26 Federal Budget deferred the original proposed start date from 1 July 2025 to the later of 1 October 2025, or the beginning of the first quarter after Royal Assent.
With a very short window for consultation on the proposed draft law, it is possible that the measures could be enacted as early as 1 July 2026. As noted above, the retrospective amendments to the definition of three elements of ‘real property’ apply from 12 December 2006.
The takeaway
The proposed amendments to broaden the foreign resident CGT base will significantly affect foreign investment, especially in energy, agriculture and infrastructure sectors. Non-resident investors holding or planning to acquire affected assets should closely consider how these measures might impact their economic returns.
The Government’s consultation on these measures runs for only two weeks from release, with submissions closing on 24 April 2026. Affected investors and their advisors may wish to communicate any concerns, including the potential disincentive of investing in affected assets, during the Consultation Process so the Government can address these issues before implementing the changes.
Our tax team is available to help you navigate these new rules when they come into effect.
Learn more about how our Tax services can help you
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Treasury is taking steps to ensure fairer tax treatment for foreign resident investors by tightening Australia's foreign resident Capital Gains Tax (CGT) regime. Proposed changes aim to broaden the CGT base and enhance integrity, impacting infrastructure, energy, agriculture, and more.
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