Government releases draft legislation to strengthen the foreign resident CGT regime

In brief

On 10 April 2026, the Australian Government released draft legislation that aims to strengthen the foreign resident capital gains tax (CGT) regime. First announced in the 2024-25 Federal Budget, the proposed amendments are designed to ensure that CGT applies when foreign residents dispose of assets with a close economic connection to Australian land and natural resources. The Government has provided very limited transitional relief for investment into the Australian renewables sector as part of the energy transition by introducing a four-year time-limited 50% CGT discount for foreign resident investors in Australian renewable energy assets. Consultation on the draft legislation is open until 24 April 2026.

The draft legislation proposes significant changes across several areas, including the introduction of a statutory definition of "real property", a broadened scope for taxable Australian real property (TARP), a revised principal asset test (PAT), new vendor notification obligations for large transactions, and retrospective amendments dating back to 2006 to deal with the interaction with state and territory severance laws and certain “fixed” improvements/chattels. These changes will affect foreign investors, fund managers, and any parties involved in past or future transactions concerning Australian real property interests.

In detail

Under the current rules in Division 855 of the Income Tax Assessment Act 1997 (ITAA 1997), foreign residents are generally only subject to Australian CGT on the disposal of "taxable Australian property" - which includes direct interests in taxable Australian real property (TARP) and indirect interests through entities whose underlying value is principally derived from TARP (known as indirect Australian real property interests, or IARPI).

Since these rules were introduced in December 2006, uncertainty has arisen regarding the scope of "real property", and in particular the interaction with state and territory laws that treat certain fixtures as personal property. The Government's draft legislation seeks to make a number of changes to the rules that not only strengthen its application but also resolve some disputes that we have seen emerge in recent years through the Courts. Separate draft legislation provides a temporary CGT concession in the form of a CGT discount available for future transactions until 1 July 2030 for foreign investors in Australian renewable energy assets.

New statutory definition of real property

A central element of the draft legislation is the introduction of a statutory definition of "real property". Currently, the term is not defined for income tax purposes and its meaning is determined by reference to general law principles and state or territory property law, including severance provisions that may treat certain items fixed to land as personal (rather than real) property.

The proposed definition significantly expands the ordinary meaning of "real property" and explicitly includes:

any interest or right over land
a personal right to call for or be granted an interest in land
a licence or contractual right exercisable over or in relation to land
things fixed to land, or installed on land, where their primary purpose involves being located on that land for the majority of their useful life, and
leases or licences over any of the above.

Importantly, the draft legislation provides that state and territory severance provisions are to be expressly disregarded in determining whether an asset constitutes real property for income tax purposes. This is a significant development, as it removes the potential for differing outcomes depending on which state or territory's property law applies.

In addition, the scope of TARP has been expanded to specifically include water entitlements (and related water rights) as well as options or rights to acquire such TARP assets.

Whilst the proposed new definition of real property brings a much wider range of assets into the Australian tax net, the Government moved away from the originally proposed concept of assets with a “close economic connection to Australia”, which would have likely introduced more uncertainty.

The draft legislation also ensures that the changes made to the definition of real property carry through to certain of Australia’s tax treaties but only operates for future transactions. This is achieved via a proposed amendment to the International Tax Agreements Act 1953, which states that where a treaty provides that the expressions “real property” or immovable property” take their meaning from domestic law, this is to be read in Australia as a reference to the expanded taxable Australian real property definition under tax law (including all the amendments discussed above). This is much broader than where the definition was viewed as a reference to domestic general law.

IARPI and changes to the principal asset test

The principal asset test (PAT) determines whether a membership interest in an entity (such as shares in a company or units in a trust) is an indirect Australian real property interest (IARPI). Under the current rules, the PAT is applied at a single point in time - the time of the relevant CGT event.

The draft legislation replaces the point-in-time test with a 365-day lookback test. Under the proposed approach, the PAT will be satisfied if, at any time during the 365-day period ending at the time of the CGT event, the sum of the market values of the entity's assets that are TARP exceeds the sum of the market values of all of the entity's assets. In effect, if the entity's assets were principally TARP at any point in the preceding year, the membership interest will be treated as an IARPI.

This change is intended to prevent possible manipulation of the test through short-term asset restructuring and to reflect the economic substance of the entity's asset base over time. It does, however, present practical challenges to both vendors and purchasers going forward – it will be much more difficult for a purchaser to make an assessment of whether shares or units are IARPI, placing greater reliance on vendor declarations, and make the application of the test for both parties more difficult and costly. For example, the proposed 365-day test would technically require the assets to be valued each day in the 365-day period. This is impractical and unlikely to be strictly followed.

IARPI and mining, quarrying and prospecting information

The draft legislation also clarifies the treatment of mining, quarrying or prospecting information (MQPI) in working out whether an interest is an IARPI. This change will be particularly relevant for foreign investors in Australian resources companies.

While MQPI is not itself re-characterised as TARP, it will be included on the TARP side when applying the PAT for the purpose of determining whether a membership interest is an IARPI. This is intended to recognise a close economic connection between MQPI and Australian land and natural resources.

Vendor notification requirements for large transactions

Currently, foreign residents disposing of certain membership interests can provide a vendor declaration stating that the interest is not an IARPI, which relieves the purchaser from foreign resident capital gains withholding obligations. Under the existing framework, purchasers are only required to question the validity of a vendor declaration if they "know" it to be false.

The draft legislation introduces two important changes to this framework. First, for transactions involving membership interests with a market value of $50m or more that are not IARPI, foreign resident vendors will be required to notify the Commissioner of Taxation when making a vendor declaration. The notice must be given at least 28 days before the settlement date (if the period between signing the contract and settlement is more than 31 days), or as soon as reasonably practicable (if the period between signing the contract and settlement is 31 days or less). Practically, the vendor will now also need to declare to the purchaser that they have notified the Commissioner and the date on which the notification was made. Both declarations must be given for the purchaser to rely on the vendor's declaration of “non-IARPI” status and avoid withholding obligations. The purchaser cannot rely on either declaration if they know, or could reasonably be expected to know, it to be false.

Second, the purchaser's obligation in relation to false vendor declarations has been changed from a subjective "knowledge" test to an objective "reasonably concluded" test. A purchaser will be taken to have reasonably concluded that a vendor declaration is false where, having regard to all the relevant circumstances, a reasonable person in the position of the purchaser would have reached that conclusion. The explanatory materials released with the draft law confirm this is an objective test and clarifies that purchasers are expected to undertake and document proportionate, customary checks such as reviewing ASIC/ABR extracts, transaction documents, and any residency disclosures and address obvious inconsistencies through routine queries, and retain records.

This change is intended to strengthen the integrity of the withholding regime for significant transactions. This new notification requirement will give the Commissioner a “heads-up” that a large transaction for the disposal of membership interests in any Australian entity is about to occur and provide an opportunity for the ATO to make its own inquiries into the transaction before the transaction completes and the proceeds leave Australia.

Retrospective application

A notable feature of the draft legislation is that certain amendments will apply retrospectively to CGT events occurring on or after 12 December 2006 - the date on which the current foreign resident CGT rules in Division 855 commenced. Specifically, the amendment to the meaning of "real property" in paragraph 855-20(a) including that it is not affected by state or territory severance provisions will have retrospective effect.

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 (as distinct from the broader prospective concept, which also captures things "installed on" land). Further, it is more limited in relation to licences and contractual rights. The narrower formulation is intended to limit the retrospective impact while still addressing the limitations, particularly under state and territory severance laws.

The retrospective application of these laws will likely attract significant investor attention and impact a number of prior year transactions, including outstanding disputes and cases before the courts.

Renewable energy asset transitional CGT discount

Alongside the strengthening measures, the draft legislation introduces a time-limited 50% CGT discount for eligible foreign resident entities that dispose of interests in Australian renewable energy assets. The discount is designed to less adversely impact certain foreign investment in the Australian renewable energy sector and support the energy transition, while acknowledging that the broader changes to the foreign resident CGT regime may otherwise deter such investment.

The discount is available to foreign resident companies and trustees of foreign trusts (but not foreign resident individuals). It applies to CGT events occurring from the commencement of the legislation until 30 June 2030.

For direct disposals, the relevant asset must have the primary purpose of generating, or directly facilitating the generation of, electricity from an eligible renewable energy source (as defined in the Renewable Energy (Electricity) Act 2000). For indirect disposals (i.e. membership interests), the interest must be an IARPI and must satisfy a renewable energy asset test, which requires that at least 90% of the entity's TARP value is attributable to renewable energy assets.

Key design features of the discount include:

Pre-development and development stage renewable energy assets are eligible, provided there is objective evidence supporting their intended purpose.
General transmission infrastructure (including towers, poles and wires) is excluded, but batteries used for grid firming are included.
A look-through approach applies for interposed entities, allowing the discount to flow through ownership structures.
Integrity rules prevent double-counting and artificial inflation of renewable energy asset values.
The general anti-avoidance rule in Part IVA continues to apply.

Commencement and application

The strengthening measures and the renewable energy asset discount 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 originally proposed start date from 1 July 2025 to the later of 1 October 2025 or the beginning of the first quarter after Royal Assent.

As noted above, the retrospective amendments including those relating to the interaction between real property and state or territory severance provisions apply from 12 December 2006.

With a short window for consultation on the proposed draft law (comments due by 24 April 2026), it is possible that the amending law is introduced into Federal Parliament before 1 July 2026 and potentially enacted before that time. Other than those CGT assets that are affected by the retrospective measures, this could mean that Australia’s capital gains tax would apply to disposals of the newly covered CGT assets where the CGT event (e.g. contract date) occurs at any time from as early as 1 July 2026.

The takeaway

The draft legislation represents the most significant reform to Australia's foreign resident CGT regime since Division 855 was introduced in 2006. Taken together, the changes will significantly broaden the scope of assets caught by the regime, make the principal asset test more difficult to apply and impose new notification and compliance obligations on vendors and purchasers of significant interests.

Foreign investors, fund managers, and advisers should carefully review the draft legislation and assess the potential impact on existing and planned investment structures. In particular, the 365-day lookback test for the PAT, the expanded definition of real property, and the retrospective application of the severance law clarification may have immediate practical implications for current positions.

The renewable energy asset discount provides some incentive for foreign investment in the sector, but its time-limited nature (expiring 30 June 2030) and the specific eligibility conditions - including the 90% TARP threshold for indirect disposals - will require careful consideration and may be of limited benefit for foreign investors.

Consultation on the draft legislation closes on 24 April 2026. Submissions can be made through the Treasury consultation page. We encourage affected stakeholders to engage with this process given the breadth and significance of the proposed changes.