Australian real estate – income tax round up

The Australian Government and the Australian Taxation Office (ATO) have made a number of announcements and reforms in recent times impacting the Australian real estate industry. The majority of the changes will impact foreign investors and increase reporting requirements to the ATO.

Review of thin capitalisation reforms

The Australian Government has announced that it has tasked the Board of Taxation (the Board) with undertaking an independent review of Australia's thin capitalisation reforms. The review will assess whether the thin capitalisation amendments are operating in a manner consistent with their policy intent.

The terms of reference for this review require the Board to consider:

• The overall performance of the thin capitalisation amendments in strengthening the thin capitalisation regime to address risks arising from the use of excessive debt deductions.

• Any minor and technical drafting changes which are necessary for the practical administration of the laws, with a particular focus on the third-party debt test (TPDT) provisions and related undefined legislative terms.

• If the $2m exemption threshold should operate as a net debt deduction concept (including interest income) rather than the current gross debt deduction.

• Whether the default tax EBITDA calculation operates to appropriately reflect an entity's economic activity in the income year and across multiple income years, as intended.

• The practical impact on the cost of complying with the debt deduction creation rules after restructures, including whether the rules have effectively discouraged debt deduction creation schemes.

The Board will conduct a public consultation process to inform its final report. The review commenced on 1 February 2026, with the Board to deliver its final report to the Government within 12 months. This is in line with the legislative requirement for this review to commence no later than 1 February 2026 and be completed within 17 months of commencement. 

This review will present an opportunity for affected taxpayers to provide feedback on the constraints and commercial complexities encountered in applying the new rules (including the third-party debt test), which is a particular area of focus in the terms of reference.

Interest withholding tax exemption guidance – section 128F 

The ATO has announced that it will consult with industry in respect to the public offer requirement contained in section 128F of the Income Tax Assessment Act 1936. 

It appears the ATO is seeking to understand how the market operates and how/what form offers typically look like, for instance, the level of detail in the offer, how long the offer is open for, who makes the offer, mode of the offer, etc. To this end, the ATO will be meeting with various industry representatives in the financial markets, primarily bankers, to discuss these issues. A small number of industry bodies (e.g. Australian Banking Association (ABA) and Australian Financial Markets Association (AFMA)) are also involved.

Following this process, the ATO is likely to issue draft guidance in the latter half of the 2026 calendar year, followed by consultation and a final document in early 2027. The precise form of the product is unknown.

Reportable Tax Position Schedule – for Managed Investment Trusts (MITs) and Attribution MITs (AMITs)

The ATO announced last year that it is planning to expand the Reportable Tax Position (RTP) Schedule to super funds and collective investment vehicles (CIVs) in 2026. 

The 2026 RTP Schedule instructions that were released recently, however, contained no indication of this change. The ATO has since verbally confirmed that they are developing instructions specific to super funds and CIVs following targeted consultation with the industry. The instructions will be released prior to 30 June 2026 and contain a subset of the company RTP questions as well as RTP questions specific to both industries. 

The ATO has advised that the new requirement to lodge the RTP schedule will apply to MITs, AMITs & corporate collective investment vehicles (CCIVs) where the entity has modified total business income (which includes gross capital gains) exceeding $250m in an income year. Total business income for CIVs will be gross income, modified to include gross capital gains. It appears that the total business income test is on a standalone basis and the gross turnover of related entities are not included.

Property development arrangements 

The ATO has released Taxpayer Alert TA 2026/1 on contrived property development arrangements (PDAs) between related parties. In short, the ATO is scrutinising structures that separate land ownership and development activity, defer developer income while claiming progressive deductions for construction costs. This can create an artificial mismatch that defers tax on profits and allows the utilisation of tax losses elsewhere to reduce the overall tax payable position of the group.

The ATO focuses on structures that interpose an SPV developer entity that enters a PDA with a landowner under common ownership. The PDA terms allow the deferral of developer income to completion. The developer has limited in-house capability, its activities are outsourced, and losses are used to offset group income. Repetition across projects heightens concern where group-wide tax is reduced or perpetually deferred.

An illustrative example involves a thinly capitalised developer with no staff, raising funding via utilising security provided by the landowner, outsourcing works, claiming deductions progressively, and deferring invoicing under the PDA until completion and then repeating the model across projects.

The ATO considers these arrangements contrived and capable of engaging integrity rules, including Part IVA, where tax advantages arise from artificial separation of activities, income deferral, and loss generation.

The ATO is reviewing such arrangements now and will shortly release a draft practical compliance guideline with risk indicators and their compliance approach.

Other announced (but not actioned) changes

Captive MITs

In early 2025, the ATO released Taxpayer Alert TA 2025/1 in relation to captive MITs, with a focus on restructures to access the MIT withholding regime. In summary:

• The Taxpayer Alert addresses the ATO’s concerns regarding arrangements that restructure existing investments to inappropriately access the MIT withholding regime (including deemed CGT treatment).

• The Taxpayer Alert suggests that the restructured arrangements may present a risk that either:

  • the Australian trust does not satisfy the substantive requirement to be a MIT eligible to access the MIT withholding regime (e.g. a unit trust will not qualify as a MIS as defined in section 9 of the Corporations Act 2001 where the unitholders in the trust are all companies within the same corporate group and the promoter of the trust is also a member of that corporate group), and

  • Part IVA could apply where there is no commercial rationale for the steps taken to qualify as a withholding MIT.

The Taxpayer Alert specifically deals with restructures, however, the ATO acknowledges that they are also aware that there are existing MITs that were established for making new inbound investments into Australia (as opposed to a restructure) that are indirectly owned by a single foreign entity. The Taxpayer Alert states the potential application of Part IVA may also be a relevant consideration for these structures. However, in positive news, the ATO have advised they will not apply compliance resources to these structures if they were established prior to the publication of the Taxpayer Alert unless there is material new investment or ownership change.

In response to this Taxpayer Alert, the Government announced that it will amend the income tax laws to ensure legitimate investors can continue to access concessional withholding tax rates in Australia while strengthening guidelines to prevent misuse. The announcement stated that "The amendments will make clear that trusts ultimately owned by a single widely-held investor (e.g. a foreign pension fund) are able to access the MIT concessions."

Clean building MITs 

It was announced in the 2025-26 Federal Budget that the start date to extend the clean building MIT withholding tax concession to cover data centres and warehouses that meet energy efficiency standards will be deferred from 1 July 2025 to the first 1 January, 1 April, 1 July or 1 October after the amending Act receives Royal Assent. There has been no update since this announcement. 

As a reminder, distributions of rent and capital gains made by a MIT that qualifies as a clean building MIT are subject to the lower final 10% MIT withholding tax where the distribution is paid to a foreign investor that is resident of an exchange of information country. 

As part of this announced change, the standard energy rating and Green Star required to access the clean building concession will be increased which could mean that existing buildings may no longer qualify. There has been no announcement to date as to what (if any) grandfathering may apply to existing clean buildings which satisfy the current ratings requirement but will no longer qualify under the higher rating standards.

Foreign resident capital gains tax regime

Also announced in the 2025-26 Federal Budget, the start date to proposed amendments to strengthen 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 amending Act receives Royal Assent.

As a refresher, whilst specific drafting has not yet been released, the proposed changes include: 

• clarifying and broadening the types of assets on which foreign residents are subject to CGT to ensure assets with a close economic connection to Australian land and/or natural resources are appropriately captured within the tax law 

• amending the point-in-time principal asset test to a 365-day testing period (applicable to indirect Australian real property interests) so as to address an integrity risk preventing a CGT-free sale of membership interests at a time when the underlying entity does not derive more than 50% of its market value from taxable Australian real property; and 

• requiring foreign residents disposing of shares and other membership interests exceeding $20m in value to notify the ATO prior to the transaction being executed.