Australia’s non-resident CGT changes: 
a long awaited, but unwelcome, update for foreign investors 

The 2024-25 Federal Budget contained a somewhat vague (but relatively modest) announcement of a ‘clarification and broadening’ of the classes of assets in respect of which non-residents would be subject to Australian capital gains tax.  This involved moving from the current ‘real property’ based test to include assets with a ‘close economic connection’ to Australian land, along with changes to the principal asset test. In addition, there would be a new process for ATO involvement in relation to withholding declarations on disposal of membership interests. A consultation paper followed on 24 July 2024. Almost 2 years later on 10 April 2026 Treasury has released exposure draft legislation with a 2 week consultation period, seemingly to allow for legislation to be released in time for the 2026-27 Federal Budget on 12 May 2026.

Despite the (very) short consultation period, the changes, if enacted, would represent a material expansion of the Australian tax base for non-residents. Particularly alarming is the proposal that some aspects of the changes would operate retrospectively from 2006 in circumstances where many affected taxpayers will not have received tax assessments and therefore not have triggered the 4 year amendment period. The proposed changes include an amendment to require references to ‘real property’ or ‘immovable property’ in our treaties to be read as referring to ‘taxable Australian real property’ as defined in domestic law. However, that change does not operate retrospectively, so the proposed retrospectivity may only apply where treaty protection does not.

Importantly, the exposure drafts also include changes to the non-resident CGT withholding regime, which will prevent reliance on declarations that membership interests are not indirect Australian real property interests unless the ATO is notified of the declaration prior to completion of a transaction with a value of $50 million or greater. Additional compliance will be imposed on purchasers looking to rely on any such declarations.

Expanding the tax base beyond real property

Under current law, non-residents are subject to Australian capital gains tax on disposal of assets which are taxable Australian property which, relevantly, is defined to include:

• taxable Australian real property – being real property situated in Australia, leases of Australian land and mining, quarrying and prospecting rights if the relevant minerals, petroleum or quarrying materials are situated in Australia; and
• indirect Australian real property interests – being membership interests of 10% or more in an entity where more than half of the entity’s assets comprise taxable Australian real property.

Despite the exposure draft material suggesting there is some uncertainty in relation to whether ‘real property’ takes its general law meaning and seeking to assert that taxable Australian real property was always intended to capture items which are not real property at general law:

• Hespe J in YTL Power Investments Limited v Commissioner of Taxation of the Commonwealth of Australia [2025] FCA 1317 held that ‘real property’ in Division 855 takes its general law meaning, as did Colvin J in Newmont Canada FN Holdings ULC v Commissioner of Taxation (No 2) [2025] FCA 1356, each after considering the legislative history and statutory context;
• in LCR 2016/6, which considers the non-resident CGT withholding rules, the Commissioner in a number of examples refers to items which are not ‘fixtures’ being outside of the withholding regime, implicitly on the basis that they are not real property at general law and therefore cannot be taxable Australian real property;
• the Commissioner has issued a number of private rulings (including 1012939775381 and 1012811534095) which contain a detailed discussion of the concept of taxable Australian real property which proceed on the basis that the general law distinction between fixtures and chattels is relevant to identification of taxable Australian real property. However, the public version of those rulings is now accompanied by a statement that the rulings do not represent the ATO’s view of the relevant law; and
• in 2009 the definition of taxable Australian real property was amended to specifically include leases of land which are not real property under general law.

Against the above background, the proposed retrospectivity (discussed below) is especially inappropriate. 

The proposed changes reflect a clear intention to expand (and not just clarify) the concept of taxable Australian real property. Relevantly, the proposed definition will include real property situated in Australia, or which relates to land situated in Australia, or which relates to things fixed or installed on land in Australia, with ‘real property’ proposed to be defined to include:

1. any interest in or right over land, regardless of how that interest or right is treated for the purposes of any State law or Territory law;
2. a personal right to call for or be granted any interest in or right over land;
3. a licence or contractual right exercisable over or in relation to land;
4. 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, or treated in any other way, for the purposes of any State law or Territory law or at general law) – somewhat concerningly, Example 1.2 in the exposure draft explanatory memorandum suggests that it is enough that an asset will be affixed to or installed on any land for its useful life, not just the same land as implied by the language in the exposure draft legislation; and
5. a lease, licence or contractual right exercisable over a thing mentioned in paragraph (d).

Somewhat ironically given the context of these changes being to ensure that ‘real property’ as used in Division 855 does not take its general law meaning, the explanatory memorandum asserts that ‘land’ will take its general law meaning for these purposes. 

The changes will bring within the scope of taxable Australian real property:

• assets which are not fixtures at common law because they do not have a sufficient degree or object of affixation, such as wind turbines, solar panels, batteries and mining equipment;
• assets which are not fixtures at common law because they are statutorily severed from the underlying real property, such as tenant’s fixtures, electricity transmission and distribution networks and pipelines; and
• licences of land, which could potentially impact securitised licence public-private-partnership (PPP) structures – while the explanatory memorandum says that the meaning of real property is not intended to capture an entity’s licence to access premises that are ancillary to the performance of services on-site, the basis for this position is unclear.

Taxable Australian real property is also expressly expanded to include water entitlements, and options and rights to acquire other types of taxable Australian real property.

In some (limited) good news, Treasury has decided not to introduce specific integrity rules for synthetic instruments (an issue briefly explored as part of the initial consultation paper). Such instruments will likely only be caught if they are (i) an interest in or right over land; or (ii) a licence or contractual right exercisable over or in relation to land. The use of such arrangements would, of course, also remain subject to the existing general anti-avoidance rules, a deterrent which Treasury has evidently considered sufficient.

Retrospectivity

Many of the submissions in response to the July 2024 consultation paper called for any changes to the CGT rules for non-residents to be accompanied by transitional or grandfathering rules – either limiting their application to CGT assets acquired after the date on which the changes take effect, or providing for assets which were being brought within the CGT net to have their cost base reset to market value on the date of the change.

Not only does the exposure draft not provide any such transitional relief, it instead proposes to apply the most significant changes, expanding ‘real property’ in Division 855 beyond its general law meaning to include any interest or right in Australian land and anything fixed on Australian land which is, or is expected to be, situated on the land for the majority of its useful life, retrospectively from 12 December 2006 when Division 855 took effect. The treaty override changes (discussed below) are not proposed to operate retrospectively, meaning that the proposed retrospective impact appears to be limited to cases where treaty benefits do not apply.

The retrospectivity is also a clear divergence from the announcement in the 2025-26 Federal Budget that the start date of ‘[t]he 2024–25 Budget measure Strengthening the foreign resident capital gains tax regime [will be deferred] from 1 July 2025 to the later of 1 October 2025 or the first 1 January, 1 April, 1 July or 1 October after the Act receives Royal Assent’.

If enacted in the currently proposed form, the changes will affect a large number of taxpayers including many of whom are currently in dispute with the ATO as to whether assets are taxable Australian real property or indirect Australian real property interests, some of whom have cases progressing through the courts.

Further, the changes affect non-residents who typically do not lodge Australian tax returns or receive Australian tax assessments – particularly when they are disposing of assets which are not subject to Australian tax. The usual limitations on the period within which the ATO can issue amended assessments will therefore not be relevant. That is, the proposed changes will likely enable the ATO to assess taxpayers in respect of transactions entered into as far back as 2006 which did not give rise to a tax liability under the law in force at the time. While there may be practical limitations on the ATO’s ability to collect such assessments, or enforce them offshore, the mere possibility of such assessments being issued will be a particularly troubling aspect of these changes for the international investment community. Indeed far from being a theoretical possibility, it is difficult to see why the Government would make this change retrospectively if it did not consider that the ATO would seek to apply the amended law now with retrospective effect.

The rationale for the proposed retrospectivity is also dubious. The operation of State severance provisions on real property concepts was well known in 2006 as a result of stamp duty litigation. Some States such as Qld and WA already had a “fixed to land” model as a result, and other have made legislative changes to this effect since with no changes being proposed from an income tax perspective until 2024. Either Treasury ignored this precedent at the time or realised it would be inconsistent with some of its tax treaties. However, it is difficult to accept that the intended operation of the law was to capture things fixed to land regardless of their status at law.

The explanatory memorandum makes much of these “statutory severance” cases but glosses over items that are not fixtures at law and simply retain their character as chattels under the general law. The retrospectivity also covers these items and there can be no justification for that. 

In our view, the Government should abandon the proposed retrospectivity of the measure.

Treaty override

The exposure draft legislation includes an override to Australia’s tax treaties to treat references to ‘immovable property’ or ‘real property’ in the treaties as references to ‘taxable Australian real property’. The change is needed if the proposed changes to Division 855 are to apply in relation to residents in treaty countries, given the acceptance in YTL and Newmont that references to ‘real property’ in our treaties was a reference to real property under Australian general law. Such an override is possible because treaties only have effect in Australia through the International Tax Agreements Act and so that Act can effectively change what a treaty provides for. This is what has been proposed.

Unlike the broader changes to the definition of taxable Australian real property, this change will not apply retrospectively, perhaps suggesting an acceptance that this is an expansion of Australia’s taxing rights under our treaties. In any event, the different approach to retrospectivity in the treaty override rule means that the retrospective impact of the changes to Division 855 will likely be limited to residents of countries with which Australia does not have a tax treaty. 

There is a possibility that treaty partners will be aggrieved by these unilateral changes. However, Treasury has recent form in this regard with a change to override treaties inconsistent with State laws governing foreign purchaser duty and land tax surcharges. Another, not so recent, example was a specific treaty override to overcome the Lamesa case concerning indirect dealings in land rich companies. There was no significant public pushback from treaty partners in either case and so Treasury may assume they can slip this change through too.

Indirect Australian real property interests

The exposure draft proposes to expand the concept of indirect Australian real property interests in 3 ways:

• First, through application of the broader ‘taxable Australian real property’ test outlined above.
• Second, by deeming mining, quarrying or prospecting information as if it were taxable Australian real property for the purposes of determining whether something is an indirect Australian real property interest rules.
• Third, by applying the principal asset test at the time of sale and during the 365 days prior to sale – this change has the potential to be a very large compliance burden where the value of taxable Australian real property assets and other assets are closely balanced, and will no doubt increase the potential for, and cost of, valuation disputes.

Renewable energy assets

Renewable energy assets are one clear example of assets which are (at least in many cases) not real property at general law, and therefore not taxable Australian real property under current law, but which will be taxable Australian real property under the proposed changes. From a policy perspective this puts the proposed changes in clear conflict with the broader push towards net zero and the intention to increase renewable energy generation in Australia. It also comes against a backdrop of a series of other substantial tax changes which have made it more difficult for non-resident investors to generate sufficient returns to justify investment in Australian renewable energy projects, such as the substantial changes to the stapled structure rules and thin capitalisation rules.

In a bid to lessen the blow to the renewable energy sector, the exposure draft legislation includes a time-limited 50% CGT discount in relation to certain renewable energy generation assets. However, despite the Treasurer describing this as a “generous concession”, it is not clear that this discount will substantially affect the impact of the broader changes on the sector:

• Most importantly, the discount only applies for CGT events which occur between the commencement of the section (i.e. after Royal Assent) and before 1 July 2030.
  • The discount will not spur new investment in renewable assets because a new project is unlikely to be exited by 1 July 2030 (and if it is, there may be a threshold issue in some cases about whether any gain would be on capital account in any event).
  • While the discount will lessen the impact of the changes for a non-resident investor who exits an existing project by 1 July 2030 (a) the value of the project will likely be impacted as a result of the changes reducing the pool of buyers and (b) the changes are still imposing tax in circumstances where an investment was likely made based on a reasonable expectation that no tax would apply on exit.
  • The discount does not apply for CGT events which occurred before the enactment of the changes, even though the amended definition of taxable Australian real property applies retrospectively.
• The discount is limited to assets whose primary purpose is to generate, or directly facilitate the generation of, renewable energy. Accordingly, the discount will generally not apply to standalone battery energy storage solution (BESS) projects. However, the exposure draft explanatory memorandum indicates that grid-firming BESS systems that are essential for the generation of renewable electricity may meet the eligibility criteria, making this an area of uncertainty.
• Where the renewable energy project is held in an Australian entity and not directly by a non-resident (i.e., in essentially all cases), the discount will only apply where, at the time of sale, 90% (by value) of the entity’s taxable Australian real property assets are renewable energy assets – for integrated generation and BESS projects, this will likely be problematic.

Non-resident CGT withholding

The exposure draft also includes changes to the non-resident CGT withholding rules for transactions which (when aggregated with related transactions) involve proceeds of $50 million or more, and which involve a declaration that a CGT asset is a membership interest but not an indirect Australian real property interest. The changes do not apply to a declaration that an entity is an Australian tax resident. 

Broadly, under current law a membership declaration:

• enables the purchaser to not withhold from the purchase price under the CGT withholding rules unless they know the declaration to be false; and
• does not involve the ATO.

As a result of the declaration process being relatively painless under current law, it has become standard practice for declarations to be given in relation to share and unit sales involving non-residents, even where there is little doubt that the shares or units are not indirect Australian real property interests.

Under the exposure draft changes:

• for transactions with an aggregated market value of $50 million or more, 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 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 scope of which is not clear;
• the vendor must notify the purchaser that the vendor has notified the ATO, and when that occurred;
• the purchaser is only entitled 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 (in the absence of actual knowledge that a declaration is false);
  • the vendor has in fact notified the ATO, as required (the basis for this requirement is not clear, as it puts the purchaser at risk if the vendor does not notify the ATO, but indicates to the purchaser that it has notified the ATO); and
  •  the vendor has notified the purchaser that the vendor has notified the ATO.

For public M&A transactions, market practice at present is that the bidder usually engages with the ATO to clarify the application of the withholding rules; under the proposed rules, this may now require more active involvement by the target to manage the notification process with the ATO on behalf of relevant target shareholders. 

The exposure draft does not prescribe a process for the ATO to respond to notifications in relation to the making of declarations, but it would be expected (including based on the July 2024 consultation paper) that if the ATO had a concern about the correctness of a declaration it would notify the purchaser of that concern. The practical likelihood of the ATO erring on the side of caution and recommending a withholding position under the proposed framework is probably higher. It is not clear whether any avenue will exist for a taxpayer to be able to persuade the ATO in these circumstances that the underlying entity is not land rich.

What is even less clear is whether such notification by the ATO would, of itself, be expected to result in the purchaser being in a position where it could no longer rely on the vendor’s declaration as a basis on which withholding was not required (although, it is difficult to envisage a scenario whereby a well-advised purchaser would not withhold based on an ATO recommendation).