The widening tax net: foreign resident CGT reform and Australian public M&A

Under the foreign resident capital gains tax (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).

A comprehensive reform to the foreign resident CGT regime was introduced into Parliament on 2 July 2026, which will materially affect Australian public M&A transactions. 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. To illustrate this point, consider an IT services company which enters into a licence agreement with an unrelated party. The unrelated third party is the owner of a data centre, and the IT services company is given access to the data centre under the licence agreement. This arrangement may result in separate real property interests (for income tax purposes) being recognised by:

• the IT services company’s right of access
• the data centre operator’s freehold or leasehold interest
• the underlying landowner’s freehold interests (if the data centre operator only holds a lease)
• parties who provide certain property management services or other arrangements that may constitute ‘contractual rights in relation to land’
• parties that ‘enter into private land to install, maintain, repair and remove equipment as necessary to allow for the continued function of such equipment’
• parties that have rights ‘under State Law in respect of infrastructure it installed on and under land held by unrelated private entities and persons’.[2]

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. If the foreign resident’s membership interest is an IARPI, it will not be able to provide a non-IARPI vendor declaration to the purchaser, resulting in the purchaser having to withhold at 15%.

In many cases, both lessor and lessee, owner and licensor, etc. would be considered holders of real property for income tax purposes. In a public M&A context, this means that foreign resident shareholders disposing of their interests in the target may find that what were previously non-taxable membership interests are now IARPIs, attracting CGT liability. Properly valuing these distinct rights may also materially add to the administrative and cost burden borne by investors.

New notification requirement

Under the current law, a foreign resident vendor disposing of membership interests may provide the purchaser with a declaration that the membership interests are not IARPIs, enabling the purchaser to acquire the interests without withholding at 15%.

Under the reformed regime, 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 where the review period exceeds 31 days, or as soon as reasonably practicable where it is 31 days or fewer. The purchaser cannot rely on the declaration unless these requirements are satisfied. The reform also introduces a Ministerial power to specify, by legislative instrument, transaction types that are exempt from the notification requirements (eg. schemes of arrangement, regulated acquisitions).

Critically, the reform significantly alters the circumstances in which a purchaser may rely on a non-IARPI vendor declaration. Under the current regime, a purchaser is only required to withhold where it has actual knowledge that the declaration is false, allowing purchasers to rely on vendor declarations without undertaking extensive independent enquiries. By contrast, the reforms replace this subjective standard with an objective test, such that a purchaser is unable to rely on a declaration where it knows, or where it could reasonably be concluded, that the declaration is false.   

This change imposes a positive and ongoing due diligence burden on bidders which should be factored into deal timetables. The Explanatory Memorandum indicates that purchasers are expected to undertake and document proportionate, customary enquiries, including reviewing ASIC and ABR extracts, transaction documents and vendor disclosures, addressing obvious inconsistencies through routine enquiries, and retaining records of those enquiries.

However, the due diligence performed in these examples will not provide insight into a vendor’s satisfaction of the Principal Asset Test (PAT), and accordingly, are unlikely to provide comfort regarding the validity of the non-IARPI vendor declaration. In practice, a purchaser may be required to undertake further levels of enquiry to avoid relying on a false non-IARPI vendor declaration where the purchaser could reasonably be expected to know that the declaration was false.

Where there is doubt, the prudent course may be to withhold, creating a tension between commercial deal dynamics and regulatory compliance that has not previously existed in this form.

The 365-day test

The test for whether a foreign investor's indirect interest in an entity is taxable is also changing. The 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 will be 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.

In a public M&A context, 365-day testing, combined with the knowledge requirement of a purchaser in respect of a non-IARPI vendor 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 time of the relevant CGT event, rather than assessed at a single point in time. In the context of a scheme, the time of the CGT event will be the implementation date. For a takeover bid, the time of the CGT event will be:

• where acceptance occurs before the offer becomes unconditional - the date the offer becomes unconditional; or
• where acceptance occurs on or after the offer becomes unconditional - the date of acceptance.

In each case, it must be demonstrated that at no time during the preceding 365 days did the target entity derive more than 50% of its market value from TARP - a requirement that may be particularly burdensome where asset values fluctuate.

What this means for public M&A

Taken together, the proposed amendments to Australia’s foreign resident CGT regime significantly expand the compliance burden on foreign participants in Australian public M&A, and have attracted criticism as a potential deterrent to the supply of foreign capital into Australia.