The changes materially increase both the scope of Australia’s foreign resident CGT regime and the execution risk associated with M&A transactions involving land-connected assets or foreign investors.
In brief
- Since 2006, Australia has generally confined foreign residents’ CGT exposure to “taxable Australian property” (TARP), being principally direct Australian ‘real property’ and 10% or greater interests in entities whose value is principally derived from that real property (Indirect Australian Real Property Interests or IARPI). The new foreign resident CGT rules, which commence on 1 October 2026 significantly broaden the assets treated as taxable Australian real property (TARP), introduce a 365-day look-back principal asset test, and impose new ATO notification requirements for share and unit sale transactions of $50m+ by non-residents.
- Corporate deal teams should bring TARP/IARPI analysis, historical valuations, vendor declarations, purchaser diligence and potential 15% withholding mechanics into the transaction workstream from signing, rather than leaving them to completion
- The Government has finally legislated changes to the foreign-resident CGT rules, which will take effect from 1 October.
1. Principal changes – expanded definition of Taxable Australian Real Property
| Issue | Current position | Position once commenced |
|---|---|---|
| Expanded definition of TARP | Real property takes its ordinary meaning (other than as expanded to cover mining and exploration leases and licenses) | “Real property” is broadened beyond its general-law meaning. It will extend to interests and rights over Australian land, land-related licences and contractual rights, things fixed or installed on land, related leases/licences, water entitlements, and relevant options. This is likely to capture a wider range of energy, infrastructure, mining, data-centre and operating-right assets. |
| Expanded testing period for IARPI | Whether a share or unit constituted IARPI depended on determining the proportion or real property assets to non-real property assets at the date the sale agreement was signed. | For indirect disposals of shares or units, the principal asset test moves from a point-in-time assessment to a 365-day look-back test. An entity may be ‘land-rich’ if TARP exceeded non-TARP assets at any time during the preceding year. Historic asset composition and valuations will therefore become central. |
2. Principal changes – changes to CGT withholding regime
| Issue | Current position | Position once commenced |
|---|---|---|
| Interests declarations | A purchaser can generally rely on a declaration that shares or units are not IARPI, unless it actually knows the declaration is false | For transactions of $50m or more, an Interests Declaration is not enough unless the vendor has notified the Commissioner within the prescribed period and gives the purchaser a Notice Declaration, or a Ministerial instrument provides an exemption |
| Purchaser knowledge | Reliance is lost only where the purchaser has actual knowledge the declaration is false | Reliance is lost if the purchaser knows, or could reasonably be expected to know, that a Residency Declaration or Interests Declaration is false |
| Notification deadline | No pre-completion notification process for an Interests Declaration | If signing-to-completion exceeds 31 days, notice must be given to the ATO at least 28 days before completion. If the period is 31 days or less, notice must be given as soon as reasonably practicable after signing and before completion |
| Failure to notify | Not applicable | The purchaser must withhold if required notification is not made or the vendor does not provide the required Notice Declaration |
| Transaction threshold | Not applicable | New notification regime applies where the purchaser’s first cost-base element for the transaction and related transactions is $50m or more |
| Consequences | Withholding may arise for TARP/IARPI acquisitions from relevant foreign residents | The existing withholding rate remains 15%, but the new process and expanded asset scope will make withholding more frequent and more difficult to manage |
3. Transaction implications
- Any share or unit deal with a non-resident seller approaching the $50m threshold should include an early analysis of IARPI status, proposed declaration pathway, ATO notice date and contingency for withholding.
- The new PAT can require historic valuation evidence across the group. Minority foreign investors may lack access to the information needed to support a non-IARPI position.
- Transaction documents should be drafted to cover the changes to the ATO notification procedure, declarations, purchaser review rights, withholding funding, indemnities and delay consequences. Purchasers should retain evidence of proportionate checks, including corporate extracts, ownership and residency disclosures, transaction documents and follow-up enquiries on inconsistencies.
- A legislative-instrument carve-out may be made for schemes of arrangement or other court/administrative processes, but none should be assumed until its terms are confirmed. Scheme documentation should include a tax-change cooperation mechanism for obligations that arise between signing and implementation.
4. Renewable assets
The Bill includes a transitional 50% CGT discount for qualifying non-individual foreign investors in Australian renewable energy assets, and certain qualifying entity interests, for CGT events from commencement to 30 June 2040. The concession may reduce the substantive tax cost but does not remove the need to address TARP, PAT and withholding compliance.
Commentary
The amendments make foreign-resident CGT a more material risk. More diligence and process will be needed in the lead up to a transaction with a non-resident having regard to the real property definition, the 365 day look back period and mandatory ATO notification requirements.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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