This article is aimed at providing some clarity on the latest ATO exposure draft legislation regarding the foreign resident capital gains tax (CGT) regime. The ATO’s proposed reforms to the foreign resident CGT regime are set to reshape how non-residents are taxed on Australian real property and related assets.
We’ll outline the key changes from the Exposure Draft, provide practical implications, and outline what you should be considering now.
Overview of the Changes
The foreign resident CGT regime determines when non-Australian resident taxpayers are subject to Australian tax on capital gains made from certain assets, primarily Australian real property and indirect interests.
The government announced in the 2024–25 Budget that CGT would apply to foreign investors selling assets with a close economic connection to Australian land and natural resources.
The ATO’s new exposure draft legislation aims to tighten and clarify these rules, addressing perceived gaps and aligning with broader tax integrity measures.
Additionally, the government has included amendments to introduce a 50% CGT discount as a targeted, time-limited concession for certain foreign residents who dispose of Australian renewable energy assets or eligible indirect interests in such assets.
Key elements of the Exposure Draft
Expanded Definition of Taxable Australian Real Property
The draft proposes a broader scope for what constitutes taxable Australian property under Division 855 of the Income Tax Assessment Act (1997). TARP would be broadened to include assets that have a close economic connection to Australian land and/or natural resources. TARP would continue to include mining, quarrying and prospecting rights, and be expanded to include water entitlements in relation to a water resource situated in Australia, things fixed or installed on land (whether they are treated another way under state and territory law or general law), and an option or right to acquire a CGT asset over TARP assets.
Tracing Rules for Indirect Interests
Enhanced tracing rules will make it harder for foreign residents to avoid CGT by structuring investments through multiple entities. Indirect Australian real property interests (IARPI) would be defined to be a non-portfolio membership interest held by an entity in another entity that passes the principle asset test (PAT) at the point-in-time of testing or at any time during the preceding 365 days. The PAT would also require that mining information be included in the calculation of TARP assets for the purposes of ascertaining whether the interest is an IARPI.
Notification and Withholding Requirements
The reforms introduce stricter notification obligations for transactions involving foreign residents, with increased penalties for non-compliance. Under the proposed amendments, where a foreign resident disposes of non-IARPI membership interests valued at $50 million or more, they would be able to notify the ATO in the approved form and provide a vendor declaration to the purchaser confirming that they are exempt from withholding obligations.
Purchasers would be accountable for determining whether it could be reasonably concluded that the declaration is false. For disposals under the $50 million threshold, the obligations under the existing framework continue to apply; the vendor would not need to notify the Commissioner for their declaration to be valid.
Effective Dates and Transitional Arrangements
The exposure draft outlines when the new rules would apply and transitional measures for existing arrangements.
The proposed amendments to Div 855 of ITAA 1997 would generally apply to CGT events happening on or after the day the amendments actually commence, being on the earliest of 1 January, 1 April, 1 July or 1 October after assent of the enabling legislation. However, certain amendments relating to the meaning of “real property” in s 855-20(a) of ITAA 1997 would apply retrospectively in specified instances to CGT events that happen at any time on or after the introduction of Div 855 on 12 December 2006.
Renewable Energy Asset Discount Capital Gains for Foreign Residents
The exposure draft introduces a renewable energy asset discount capital gain for foreign residents.
To be eligible for the 50% CGT discount, all of the following must be satisfied:
- The capital gain is derived from a CGT event that occurs in relation to a CGT asset.
- The person receiving the discount is a foreign resident (other than an individual) or a trustee of a foreign trust for CGT purposes.
- At the time of the CGT event, the asset is taxable Australian property.
- The CGT event happens on or after the commencement of the provisions and by 30 June 2030 (sunsetting clause), and
- At the time of the CGT event, the CGT asset is either:
> An Australian renewable energy asset; or
> A membership interest that passes a renewable energy asset test.
For direct disposals, the Australian renewable energy asset must have the primary purpose of generating, or directly facilitating the generation of, electricity in Australia. For indirect disposals, the renewable energy asset test would ensure that the discount would apply to indirect interests only where 90% of the underlying value of the entity’s TARP is attributable to Australian renewable energy assets.
Notably, the proposes renewables discount would operate independently of the current Subdivision 115-A discounted gains in ITAA 1997. This means that an entity could access the renewables discount even if it would not ordinarily be entitled to a CGT discount under s 115-10 of ITAA 1997.
Practical Implications
Retrospective Application:
- The inclusion of retrospective law change back to 2006 inception is an unexpected outcome which may have unexpected outcomes for some taxpayers, particularly for historical transactions that remain open for review.
Increased Compliance Burden:
- Organisations with foreign ownership or cross-border structures will need to review their asset holdings and transaction processes to ensure compliance with these new rules.
Review of Existing Structures:
- Now is the time to assess whether current investment structures remain fit for purpose under the proposed regime. Enhanced tracing and notification requirements mean greater scrutiny of indirect interests and related-party dealings.
Renewable Energy Asset Discount:
- As drafted, the renewable energy 50% CGT discount appears to be very narrow in application due to it only applying prospectively and that it will only apply to gains realised prior to 30 June 2030.
What This Means for You
If your organisation has cross-border investments into Australia or has foreign shareholders, these changes could significantly affect your Australian tax position and reporting obligations. Early engagement with your advisers is recommended to ensure you identify and understand all the risks and opportunities.
Next Steps / Andersen Perspective
The exposure draft signals the ATO’s continued focus on tax integrity and closing loopholes in the foreign resident CGT regime. Andersen Australia can help you assess the impact of these changes, review your structures, and ensure compliance with the evolving landscape.
Consultation is currently open, with the closing date for providing comments being 24th April 2026.
Contact Andersen if you need further detail or tailored advice on how these reforms may affect you or your business.
Helpful Links
ATO: Capital gains tax for foreign residents
Treasury: Exposure Draft Legislation
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