In brief
The Australian Government has introduced into Parliament the Bill containing proposed changes to the foreign resident capital gains tax (CGT) rules.
While the Bill retains most aspects from the April 2026 Exposure Draft, there are some important changes.
While the Bill no longer contains the most controversial aspect of the proposal that sought to retrospectively expand the definition of "real property", the expanded definition will continue to apply prospectively, including to future transactions relating to existing investments.
The Bill also seeks to prevent foreign residents from applying to amend certain tax returns to reflect the narrower interpretation of real property reflected in recent Federal Court decisions.
The Bill remains before Parliament and may be subject to amendment before enactment.
Key takeaways
- While the Bill no longer proposes to retrospectively expand the "real property" definition, foreign resident vendors, as well as purchasers, will need to carefully consider whether any future transactions may be caught by the expanded definition. Because there are no grandfathering rules for existing investments, the new rules will also apply to future transactions in respect of existing investments.
- While the Explanatory Memorandum includes some further guidance on key concepts, it remains to be seen how those concepts will be interpreted and applied in practice. For example, it is not clear to what extent (if at all) the concept of whether a thing is "fixed or installed on land" may be interpreted by reference to equivalent concepts in Australian law, such as State or Territory duties rules.
- As the Bill is currently before Parliament, the Bill should be monitored for potential changes before enactment.
In detail
As outlined in our previous Client Alert, the Australian Government released an Exposure Draft in April 2026 proposing significant changes to the CGT rules applicable to foreign residents.
Following a very short period for consultation with stakeholders, the Australian Government introduced the Treasury Laws Amendment (Strengthening Accountability for Tax Adviser Misconduct and Other Measures) Bill 2026 into Parliament on 2 July 2026 containing the final form of proposed changes.
While the Bill retains many aspects of the rules initially proposed in the Exposure Draft, the Bill makes several important changes:
- The Bill no longer contains the highly controversial proposal from the Exposure Draft to expand aspects of the definition of "real property" with retrospective effect to 12 December 2006, which could have caused significant problems for foreign investors who have exited historical investments.
The Bill removes this retrospective element, meaning the proposed rules, including the expanded definition of "real property", will only apply to CGT events happening on or after the Bill's commencement date (which will be a set date depending on when the Bill is eventually passed by Parliament).
- The Bill further expands the expanded definition of "real property" that was initially proposed in the Exposure Draft. The definition of "real property" in the Exposure Draft included "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)".
The definition of "real property" in the Bill no longer includes this temporal requirement (in bold above). In other words, a thing that is fixed or installed on land will be real property irrespective of how long the thing is fixed or installed on the land. By considering whether a thing is fixed or installed on land at a point in time, as opposed to by reference to its useful life, the Bill effectively expands the situations when things may be captured as "real property".
- The ability to amend an assessment of a foreign resident's tax liability arising from a transaction relating to taxable Australian real property (TARP) and indirect Australian real property interests (IARPI) has been curtailed.
A large company will normally only have four years from the date of lodgment of their company tax return to amend that return. Where that four year period has expired, the ATO has the power to allow an amendment on application by the taxpayer. Following a series of recent Federal Court decisions that effectively narrowed the ATO's preferred interpretation of TARP, it may have been possible for foreign resident taxpayers, who lodged a return on the basis that they made a transaction in relation to TARP or IARPI, to amend their return on the basis that the assets were not actually TARP or IARPI in light of the narrowed meaning of TARP resulting from the Federal Court decisions. For more on these Federal Court decisions, see our previous Client Alert.
The Bill closes this possibility, by preventing the ATO from allowing taxpayers to amend their assessments if the standard amendment period has expired (which, as mentioned, is four years for many large companies), except in very limited circumstances (e.g., in cases of fraud or evasion, or where a taxpayer made an objection to their assessment before 10 April 2026 being when the Exposure Draft was released). Taxpayers retain the ability to amend their lodgments if the standard amendment period has not yet expired. The Government has expressed its intention in the Explanatory Memorandum that any amendments to lodgments made before the proposed rules commence will be based on the current law (i.e., the law that existed before the Bill commences). However, the Government maintains its position (carried over from the Exposure Draft) that the proposed changes merely "clarify" the meaning of the existing foreign resident CGT rules. There remains some risk that the ATO could continue to take an expansive interpretation of the definition of "real property" where they feel the facts provide sufficient scope for the matter to be distinguished from the Federal Court decisions.
- The Bill gives the Minister power to make regulations or issue legislative instruments adjusting certain aspects of the rules, including:
- The period of time for the principal asset test. Under the proposed rules, a non-portfolio membership interest (e.g., a 10% or greater shareholding in a company) will pass the principal asset test if more than 50% of the market value of the assets of the underlying company are attributable to TARP at any time in the 365 days prior to the CGT event (e.g., the date the share sale contract is signed). The Bill gives the Minister the power to set a different testing period. The Explanatory Memorandum explains that this power is intended to accommodate scenarios where foreign residents "may not reasonably be able to comply with the default 365-day test time requirement" by providing an "appropriate alternative test time".
- Whether a person is a "foreign resident" for the purposes of the CGT withholding rules. Purchasers of TARP or IARPI are required to withhold from the purchase price if, among other things, the vendor is a "foreign resident", unless an exception applies (e.g., where the vendor provides a declaration that they are an Australian tax resident or that the shares are not IARPI).
- Setting out further situations where a vendor can provide a declaration that membership interests (e.g., shares in a company) are not an IARPI, so that the purchaser does not need to withhold under the CGT withholding rules or make a related notification to the ATO. The Bill contains a requirement that obliges vendors who declare that shares are not IARPI to notify the ATO of transactions with an aggregated transaction value of AUD 50 million or more. The Explanatory Memorandum indicates that this power is intended to give the Minister the ability to exempt entities from the notification requirement where the ATO would already have visibility over the transactions (e.g., transactions subject to typically public court or administrative processes such as a scheme of arrangement).
This power allows the Government to make further rules at a later time, without having to then pass a new bill through both houses of Parliament (although the Parliament will retain some oversight power).
- The Explanatory Memorandum for the Bill provides some further guidance on key concepts in the Bill (e.g., on whether a thing is "fixed or installed on land").
The Bill also includes updates to the position expressed in the Exposure Draft in relation to the contemplated transitional relief for certain renewable energy assets, including in relation to the following:
- In determining whether a transaction in relation to a membership interest (e.g., shares in a company) is eligible for transitional relief, a market value calculation is required to compare the value of the company's "Australian renewable energy assets" to "other TARP". In the Exposure Draft, transitional relief would have been available if the ratio of the market value of Australian renewable energy assets was equal to or greater than 9:1 of the other TARP. In the Bill, that ratio has been reduced to 3:1, which should broaden the scenarios in which transitional relief would be available.
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Francis Santayana, Senior Associate, has contributed to this legal update.