Recent and proposed changes to Australia's capital gains tax (CGT) regime will materially affect the economics of real estate investment. Here’s what foreign investors, fund managers and their advisers should be considering now.
Foreign resident CGT reforms
Under the foreign resident CGT regime, capital gains and losses made by foreign residents holding assets on capital account are disregarded unless the CGT event happens in relation to assets that are taxable Australian property (TAP). TAP includes taxable Australian real property (TARP) and an indirect Australian real property interest (IARPI).
Federal Parliament has passed comprehensive reforms to the foreign resident CGT regime. The amendments are effective from 1 October 2026. Three aspects of the reform warrant particular attention.
Expanded definition of real property
A central feature of the reform is the introduction of a statutory definition of ‘real property’ which significantly broadens the scope of assets in relation to which foreign investors will be subject to tax in Australia. Previously undefined for income tax purposes, ‘real property’ will now capture anything that is fixed or installed on Australian land, as well as any lease, licence or contractual right exercisable over such assets. This concept of ‘real property’ is one of the broadest adopted by any jurisdiction, including when compared with Australia's treaty partners.
This gives rise to double-counting concerns as multiple ‘real property related’ interests could be recognised in respect of a single underlying asset. For example, both a lessor and lessee, or an owner and licensee, could separately hold ‘real property’ interests for tax purposes in the same underlying asset.
If any of these parties are foreign residents, they would need to be aware that the relevant real property interests could be material to the foreign resident CGT analysis in one of two ways:
- Where the interest is held directly by the foreign resident, it may constitute TARP.
- Where the interest is held by an entity in which the foreign resident has a membership interest, it may form part of the entity’s TARP assets for the purpose of determining whether that membership interest is an IARPI. Broadly, an IARPI arises where the foreign resident, together with its associates, holds a 10% or greater interest in the entity and more than 50% of the entity’s underlying value is attributable to TARP.
New notification requirement
Under the foreign resident CGT regime, a vendor disposing of interests in an entity may provide a non-IARPI vendor declaration to the purchaser. If the purchaser is able to rely on the declaration (see below), they do not need to withhold CGT on a sale.
A new ATO notification requirement has been introduced to operate alongside the existing non-IARPI vendor declaration. Importantly, a foreign resident vendor disposing of membership interests with an aggregate market value of $50 million or more must notify the Commissioner of Taxation before providing a non-IARPI vendor declaration to the purchaser. The notification must be lodged at least 28 days before transfer if the review period exceeds 31 days. If the review period is 31 days or less, the notification must be lodged as soon as reasonably practicable before transfer. The purchaser cannot rely on the declaration unless these requirements are satisfied. There is a Ministerial power to specify, by legislative instrument, transaction types that are exempt from the notification requirements.
Furthermore, whereas previously the knowledge threshold for reliance by purchasers was subjective – that is, whether the purchaser knew that the declaration was false - it is now objective. The question is whether it ‘could reasonably be concluded’ that the declaration is false. This imposes a positive due diligence burden on bidders which is ongoing (i.e. up to the date of signing or such other date as is applicable to the CGT event) and should be factored into deal timetables.
The 365-day test
The test for whether a foreign investor's indirect interest in an entity is taxable has also changed. The Principal Asset Test (PAT) will no longer operate as a point-in-time test. Rather, a non-portfolio membership interest will be an IARPI if the underlying entity derives more than 50% of its market value from TARP at any time during the 365 days preceding the disposal.
There is a Ministerial power to determine, by legislative instrument, circumstances in which an alternative testing time applies for the 365-day PAT look-back. The practical utility of this power will depend on the breadth of the circumstances prescribed by the Minister (if any), noting that it is expected that many taxpayers will have material issues complying with the revised default test.
365-day testing, combined with the knowledge requirement of a purchaser in respect of a non-IARPI declaration and the vendor notice requirements, is likely to make compliance onerous and costly as the target's asset composition must be monitored continuously until the date of signing (or such other date as is applicable to the relevant CGT event), rather than assessed at a single point in time.
Removal of the 50% CGT discount
From 1 July 2027, the 50% CGT discount for individuals, trusts, and partnerships will be replaced by cost-base indexation, with a new 30% minimum tax on net capital gains. Under this method, the cost base will be adjusted for inflation over the holding period, with tax payable only on the real gain.
The practical effect on real estate exit economics depends on the rate of return on the asset, the rate of inflation over the holding period, and the investor's marginal tax rate. However, for investors earning above-inflation returns, the new regime will in most cases result in a higher tax burden on exit. To illustrate: under the current 50% discount, the effective top rate on a long-term capital gain for an individual or trust is approximately 23.5%. Under the new regime, the 30% minimum tax means the effective rate cannot fall below 30%, and may approach the taxpayer's marginal rate.
Superannuation funds, however, retain the existing one-third CGT discount and are not directly affected. In sectors where valuations are highly sensitive to tax leakage and exit assumptions — including commercial and residential real estate — this creates a material competitive advantage for domestic super funds in bids, co-investments, and secondary market exits. Companies are also unaffected by the reform, as they were never eligible for the 50% discount.
Transitional arrangements will split gains on assets held before 1 July 2027 into two components: the portion accruing before 1 July 2027 continues to benefit from the 50% discount, while the portion accruing after that date is subject to the new rules. Investors should obtain valuations of their real estate assets as at 1 July 2027 to establish the boundary between the two regimes.
To maintain incentives for new housing supply, investors in new residential properties will be able to choose either the 50% CGT discount or the new cost-base indexation and minimum tax arrangements.
What this means for real estate investors
Australia’s recent and proposed tax reforms represent the most significant reshaping of the investment landscape for real estate investors in decades. Taken together, the expansion of the foreign resident CGT rules and replacement of the 50% CGT discount increase both the compliance burden and potential tax cost of holding and exiting Australian real estate investments.
