On 10 April 2026, the Federal Government released two exposure drafts proposing a significant overhaul of Australia's foreign resident capital gains tax (CGT) regime. The changes broaden the scope of taxable Australian real property (TARP), reform the principal asset test (PAT), introduce new compliance obligations (with some changes applying retrospectively from 2006) and provide a time-limited 50% CGT discount for foreign residents investing in Australian renewable energy assets. Public consultation closes on 24 April 2026.
This article summarises the proposed changes and key issues for submissions.
Overview of the existing foreign resident CGT regime
Australia's current foreign resident CGT regime is contained in Division 855 of the Income Tax Assessment Act 1997 (ITAA 1997) and has been in operation since 12 December 2006.
The general rule is that a foreign resident can disregard a capital gain or capital loss from a CGT event, unless the relevant CGT asset is "taxable Australian property".
Taxable Australian property encompasses five categories of CGT assets. Two of these categories are the focus of the current amendments: taxable Australian real property (TARP) and indirect Australian real property interests (IARPIs).
Under the current law, TARP is defined as "real property situated in Australia" (including a lease of land) and mining, quarrying or prospecting rights (to the extent the right is not real property), if the relevant minerals, petroleum or quarry materials are situated in Australia. “Real property” is not specifically defined for income tax purposes, so the tax law relies on its ordinary meaning. Furthermore, Australia’s double tax treaties also typically defer to the meaning of that term in Australia’s tax laws. In the explanatory material accompanying the exposure draft legislation, the Government states that the lack of a statutory definition has given rise to uncertainty and inconsistent treatment depending on the state or territory in which an asset is located.
An IARPI is a non-portfolio membership interest (10% or more) held in an entity that passes the principal asset test (PAT). The PAT is satisfied where more than 50% of the market value of the entity's assets is attributable to TARP. Under current law, the PAT is applied just before the relevant CGT event.
The foreign resident CGT withholding regime, contained in Subdivision 14-D of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953), operates alongside Division 855 and imposes a withholding obligation where a purchaser acquires taxable Australian property (including TARP or IARPIs) from a foreign resident, unless an exclusion applies, for example where the vendor provides a declaration that the relevant membership interest is not an IARPI.
The expanded definition of real property
The key measure is a new, inclusive statutory definition of ‘real property’ in the ITAA 1997.
The new definition builds on the ordinary meaning of real property to include:
- Any interest in or right over land, regardless of how that interest is treated under state or territory law.
- A personal right to call for or be granted any interest in or right over land.
- A licence or contractual right exercisable over or in relation to land.
- A thing (or combination of things) fixed or installed on land that is, or is expected to be, situated on the land for the majority of its useful life, regardless of its characterisation under state or territory law or general law.
- A lease, licence or contractual right exercisable over any such thing.
Key issues with the proposed definition:
- The meaning of ‘a thing … fixed or installed on land’. The explanatory materials state that this extends beyond what are ordinarily understood as fixtures to other things that are ‘installed’ on the land. Examples given include utilities infrastructure, transmission lines, substations, wind turbines, solar panels, large-scale battery energy storage systems and heavy machinery installed on land. While the intention of the new definition of real property is to address uncertainty within the current foreign resident CGT framework, the introduction of new terms such as ‘installed’ will itself create uncertainty.
- Licences and contractual rights. The explanatory materials provide that the definition of real property is broader than the equivalent definition under the A New Tax System (Goods and Services Tax) Act 1999 (GST Act). Unlike the GST Act definition, which is limited to licences to occupy land, the new definition extends to licences exercisable "over or in relation to land", which includes licences that exploit land such as forestry, agricultural and water licences. It will be necessary to consider what types of contractual rights might be covered. For example, projects undertaken to generate Australian Carbon Credit Units under Australia's carbon farming initiative laws typically involve the granting of rights by a landowner to a project proponent.
- One-term, one-meaning. The new definition of real property applies across the ITAA 1997and the TAA 1953. The explanatory materials state that although this technically broadens the scope of the term in relation to other provisions, it is not intended to have any practical effect on the operation of those provisions. There are various provisions which use the term ‘real property’ including the non-commercial loss, capital allowances and the taxation of financial arrangements rules, so it will be important to confirm that the proposed definition does not have any unintended consequences under these other provisions.
A key concern is the retrospective application from 12 December 2006 of a modified definition of real property (different to the definition outlined earlier). The exposure draft provides that the current reference to "real property situated in Australia" in section 855-20(a) should be taken to include:
(a) Any interest in or right over land situated in Australia (regardless of how that interest or right is treated for the purposes of any State law or Territory law).
(b) A thing (or combination of things) that is fixed on land situated in Australia 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).
(c) A lease of a thing mentioned in paragraph (b) of this subitem.
The Government's position is that the retrospectivity is intended to confirm the original policy intention of the foreign resident CGT regime. The explanatory materials state that assets constituting interests in land and fixtures that have not been affected by state or territory severance provisions are "not substantively affected by the retrospective amendment". However, if assets were historically excluded from Australia's foreign resident CGT base due to the operation of such severance provisions, the retrospective application represents a substantive change. Where foreign residents have relied on the existing law in structuring their investments or where foreign residents have previously disposed of CGT assets and have self-assessed on the basis that those assets were not taxable Australian real property, the retrospective application of these changes may reopen settled positions.
For example, in YTL Power Investments Ltd v Commissioner of Taxation [2025] FCA 1317 handed down on 30 October 2025, the Federal Court found that transmission network lease assets were not taxable Australian real property. In that case, the taxpayer, YTL Power Investments Ltd (YTL) had disposed of its shares in ElectraNet Pty Ltd (ElectraNet), which operated the electricity transmission network in South Australia. The court determined that the rights ElectraNet held under the Transmission Network Lease in respect of the leased transmission infrastructure (poles, pylons and other network assets) were not real property and did not amount to a lease of land for paragraph 855-20(a) purposes. In particular, for assets on land belonging to the lessor or on land owned by ElectraNet, the court took into account the effect of the South Australian privatisation legislation, which treated the transmission infrastructure, although affixed to land, as being dealt with as personal property severed from the land, so that leasing the infrastructure under the network lease did not carry any proprietary interest in the land. As a result, those lease rights were non-TARP assets.
Although the retrospective amendments take effect from 12 December 2006, the four-year amendment period should limit the Commissioner's ability to reassess disposals that occurred many years ago where a return was filed and an assessment issued, absent fraud or evasion. However, in some cases, a foreign resident may never have lodged an Australian tax return meaning no assessment may have issued, in which case it would be open to the Commissioner to make an assessment at any time.
In summary, the proposed retrospectivity should be of concern to foreign resident investors in infrastructure and energy assets who may have disposed of interests prior to these amendments on the basis that the relevant assets were not real property (for example, due to the operation of state severance provisions). The retrospective application could expose those investors to CGT liabilities for disposals going back nearly two decades. The ATO's approach to such historical cases will need to be confirmed as a matter of urgency.
Aligning the PAT with the OECD Standard
The amendments expand the PAT from a point-in-time test to a 365-day lookback test. Under the new test, a non-portfolio membership interest will be an IARPI if the assets of the entity in which the interest is held derive more than 50% of their market value from TARP at any time during the 365 days preceding the CGT event.
The proposed lookback test may create significant compliance obligations for foreign residents who will need to track the composition and market values of an entity's underlying assets over the entire year preceding a disposal.
The explanatory materials state that the lookback test is an integrity measure which reduces the ability of entities to manipulate the asset composition of the interest in anticipation of a sale to avoid passing the PAT at the point of sale. It is unclear why existing integrity measures such as the general anti-avoidance provisions in Part IVA of the Income Tax Assessment Act 1936 would not be sufficient to address such behaviour. The 365-day lookback may capture genuine commercial fluctuations in asset values, for example where asset revaluations driven by market conditions rather than any intent to manipulate the satisfaction of the PAT. As taxpayers bear the onus of proving that assets sold are not IARPI in a dispute, there are also likely to be practical challenges in evidencing that the PAT was never satisfied during the 365-day lookback period in circumstances where the value of TARP and non-TARP assets are close.
Inclusion of mining, quarrying and prospecting information in the PAT
The proposed amendments will also provide that mining, quarrying and prospecting information (MQPI) will be treated as TARP for the purposes of the PAT. While MQPI is not itself TARP, the explanatory materials state that it is integral to the value of mining, quarrying and prospecting rights and associated assets.
MQPI is typically valued together with associated mining rights. The amendments require the value of MQPI to be separately identified for PAT purposes.
Foreign resident CGT withholding and vendor notification
The withholding regime requires a purchaser that acquires taxable Australian property from a foreign resident to pay 15% of the consideration to the Commissioner. The obligation does not apply where, depending on the nature of the asset, the vendor obtains a clearance certificate or provides a written declaration that the vendor is an Australian resident or that the interests are not IARPIs. Currently, a purchaser may rely on such a declaration provided the purchaser does not know it to be false.
The amendments introduce two significant changes to this framework. First, for transactions with an aggregated value of $50 million or more, a new notification framework will apply. Where a foreign resident vendor makes a non-IARPI declaration to a purchaser, the vendor must also notify the Commissioner depending on the review period – being the period from when the contract is entered into and ending immediately before the purchaser becomes the owner of the CGT asset:
- Where the review period exceeds 31 days, the vendor must give notice at least 28 days before the end of the review period.
- Where the review period is 31 days or fewer, notice must be given as soon as reasonably practicable after the period begins and in all cases before it ends.
Second, the amendments lower the knowledge threshold for purchasers relying on vendor declarations from a subjective test (the purchaser must ‘know’ the declaration is false) to an objective test (whether it "could reasonably be concluded" the declaration is false). This places a higher onus on purchasers to conduct due diligence in relation to vendor declarations, including reviewing transaction documents and residency disclosures.
These changes may have implications for the timeline of M&A processes.
The renewable energy asset CGT discount
The second exposure draft proposes a 50% CGT discount for eligible foreign residents disposing of Australian renewable energy assets, or qualifying indirect interests, for CGT events occurring from commencement until 30 June 2030.
The discount is available only to foreign residents that are not individuals such as corporate entities and trustees of foreign trusts. For direct disposals, the asset must have the primary purpose of generating, or directly facilitating the generation of, electricity in Australia using an eligible renewable energy source within the meaning of the Renewable Energy (Electricity) Act 2000. For indirect disposals, the membership interest must pass a renewable energy asset test requiring that at least 90% of the underlying value of the entity's TARP must be attributable to Australian renewable energy assets.
The primary purpose test requires that the asset be used predominantly for generating or directly facilitating the generation of renewable electricity. This may create uncertainty for multi-use assets or assets in early development stages. The explanatory materials state that pre-development assets may satisfy the test where objective evidence demonstrates that the asset forms part of a renewable energy project, such as grid connection agreements, development approvals or offtake agreements. Stakeholders should seek clarity on how this test applies to mixed-use infrastructure and assets that serve both renewable and non-renewable purposes.
The renewable energy asset test also requires that 90% or more of the value of an entity's TARP assets must be attributable to Australian renewable energy assets. This is a very high threshold and may effectively exclude foreign institutional investors in diversified energy platforms – which hold a mix of renewable and non-renewable assets – from accessing the discount, notwithstanding that such platforms are a primary vehicle for foreign capital investment in Australia's energy transition.
The discount is designed as a transitional measure to assist foreign investors in pricing CGT into their investment models. Stakeholders should consider whether the sunset date of 30 June 2030 provides sufficient time for investors to adjust, particularly given the long development timelines typical of renewable energy projects, and whether a staged phase-out might be more appropriate.
Conclusion
The proposed amendments significantly expand the CGT net for foreign investors through a broadened definition of real property, the override of state and territory severance provisions, retrospective application to 2006, an enhanced PAT and new compliance obligations. The companion renewable energy discount provides some relief but is narrowly targeted and time limited. Foreign investors in Australian land, infrastructure and energy assets should assess their exposure and engage with the consultation process as a matter of priority.
The timing of this announcement and the short two-week consultation period, is notable given the 2026–2027 Federal Budget will be handed down on 12 May 2026.
Please reach out to a member of the G+T tax team if you would like to discuss how these proposed changes may apply to you or your business.