More than a plug to the leaky ‘TAP’ – retrospectivity and other features of new Exposure Draft could endanger the supply of foreign capital

The highly anticipated exposure draft legislation (exposure draft) amending Australia’s foreign resident capital gains tax (CGT) regime issued by Treasury on 10 April 2026 is full of surprises (and not in a good way).  The exposure draft goes beyond what was proposed in the 2024-25 Federal Budget, and includes some amendments applying retrospectively to transactions occurring from 12 December 2006.  If enacted, it would result in a material expansion to the scope of assets and foreign investors that will be subject to tax in Australia. 

Treasury’s consultation for the exposure draft amendments closes on 24 April 2026. 

Summary of exposure draft amendments

Key takeaways

• The reform is a significant expansion of what constitutes “real property” for the purposes of the foreign resident CGT rules. It expands the definition of “real property” beyond land in the narrow sense to include a wider class of assets with a connection to Australian land or natural resources.
• Some of the changes have retrospective application back to 12 December 2006.
• By contrast, the renewable energy relief is limited and transitional, with a 50% CGT discount proposed for eligible foreign residents on certain disposals of Australian renewable energy assets from commencement until 30 June 2030.
• Finally (but no less importantly), the new ATO notification obligation will add to the due diligence requirements for purchasers, now up to the time of completion of the transaction. This will be particularly so for public M&A transactions involving schemes of arrangement and takeovers.

Holders or prospective buyers of Australian “real property” assets should consider carrying values, expected sale outcomes and tax consequences of entering into transactions based on the proposed amendments, and factor these considerations into investment and purchase price considerations.  Further, foreign sellers of relevant assets should potentially re-consider their taxable positions from historic sales going back to 12 December 2006.

Other than in relation to the retrospective changes, the proposed measures will impact CGT events happening on or after the commencement of the amendments (being the first day of the first quarter after the changes receive Royal Assent). The exposure draft does not propose any grandfathering provisions providing relief for existing investments (other than the narrow form of relief proposed in relation to investors in renewable assets).

The proposed amendments should be closely considered and monitored by foreign investors in Australian real estate, infrastructure, energy and resources, including foreign pension funds, sovereign wealth funds, private equity and broader infrastructure capital.

What’s Next

The consultation period closes on 24 April 2026 – an extremely short time frame given the nature of the proposed amendments and the fact the measures were first announced nearly two years ago.  Market participants, particularly foreign investors in land-intensive, resources and renewable energy projects, should review the draft rules now and consider whether submissions should be made before consultation closes.

Overview of Division 855

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). The range of assets in relation to which foreign residents are taxable was reduced with effect from 12 December 2006, when Division 855 commenced.

Relevantly, TAP includes:

• taxable Australian real property (TARP) (i.e. real property situated in Australia (including a lease of Australian land) and certain mining, quarrying or prospecting rights; and
• an indirect Australian real property interest (IARPI) (i.e. a membership interest in an entity, the underlying value of which is principally derived from TARP).

The term ‘real property’ was previously undefined for income tax purposes, which Treasury has suggested results in “inconsistent capital gains treatment of land-based assets, in some cases based on their location across Australia”.  This view is not universally held.

The exposure draft is said to address an area of longstanding uncertainty by ignoring state and territory laws with retrospective effect back to 2006.  In practice, we consider that the exposure draft has potential to apply far more broadly than indicated by Treasury. 

Broadening the scope of taxable Australian real property

The exposure draft proposes two key changes to the concept of TAP:

• insert a definition of ‘real property’ to be used throughout the ITAA 1997; and
• expand the coverage of section 855-20 of the ITAA 1997, which sets out what CGT assets are TARP.

Both changes will significantly broaden the foreign resident CGT tax base.

Definition of real property

While the focus is on the application of the definition of “real property” in the context of the foreign resident CGT rules, it also applies more broadly across the income tax law in line with the one-term, one-meaning principle.  However, the concept of an “eligible investment business” (which includes investing in land for the purpose, or primarily for the purpose, of delivering rent) for managed investment trusts and public trading trusts is not extended.

Taxable Australian real property

The exposure draft proposes to expand the concept of TARP in section 855-20 with the following effect:

• Real property: expanded to include real property (as defined above) that:
  1. is situated in Australia; or
  2. relates to land situated in Australia; or
  3. relates to a thing (or combination of things) fixed or installed on land situated in Australia;
• Mining, quarrying or prospecting rights: unchanged;
• New: a water entitlement in relation to a water resource situated in Australia.

Retrospective application of the exposure draft

Aspects of the expanded definition of ‘real property’ are proposed to apply retrospectively to CGT events happening on or after 12 December 2006.  This retrospectivity applies to three categories of real property:

• any interest in or right over Australian land, regardless of how those interests or rights are characterised under State or Territory law;
• a thing (or combination of things) fixed (not merely installed) on Australian land that is, or is reasonably expected to be, situated on the land for the majority of its useful life, regardless of whether it is a fixture or treated in some other way under State or Territory law or at general law; or
• a lease of a thing described in the second bullet above.

The retrospective operation of the exposure draft does not explicitly extend to the broader prospective limbs, for example those dealing with personal call rights, licences or contractual rights over land.  However, it is arguable that the breadth of the language proposed by the exposure draft, specifically, ‘any interest in or right over Australian land’, may extend to some contractual rights contemplated by the prospective limb. 

Observations

These changes represent a significant expansion of what real property is for income tax purposes — prospectively and retrospectively — beyond what was expected from the 2024-25 Budget and consultation.  The amendments represent momentous changes for foreign investors and have the potential to significantly impact foreign investment into Australia.

A thing “fixed or installed on land” in the new definition of real property includes, but is not limited to, what is ordinarily understood to be a fixture and other things fixed to or installed on land.  This represents a significant expansion and is closer to similar definitions in State and Territory legislation focusing on whether an asset is fixed to land regardless of its status at law as a fixture.  As occurred for stamp and landholder duty purposes historically, this will significantly change relevant TARP calculations when assessing if foreign resident CGT will apply.

The “fixed or installed” limb adopts a broader concept of real property than that reflected in the OECD Model Tax Convention commentary. The OECD commentary focuses on immovable property itself and, separately, land rich shares or comparable interests, rather than assets brought within the tax base because of their economic connection to land.

Under the amendments, real property also includes licences or contractual rights exercisable over or in relation to land, including licences that exploit land.  Whilst Treasury flags that it is not intended to capture an entity’s licence to access premises that are ancillary to the performance of services on-site, Treasury appear to be targeting arrangements that provide access to ‘land’ without being real property at law (e.g. common data centre arrangements).The scope of the expression ‘contractual right in relation to land’ is unclear.

The multiple categories of real property appear to disregard who the legal owner or ‘holder’ (for certain tax purposes) of the land or real property asset is at law.  For example, both data centre ‘owners’ and ‘users’ (i.e. those with license or right of use agreements) can recognise real property.  In our previous Alert we expressed the hope that the new provisions would only apply to the entity which has directly or indirectly incurred the costs of such assets and is treated as the holder (direct or indirect) of those assets under the capital allowance provisions, such that the assets are not inadvertently treated as the property of the owner of the land upon which they are situated where the owner is not the relevant holder for depreciation purposes. The proposed amendments do not address this concern - the extension of the definition of ‘real property’ to include fixed/installed assets has the potential to include another taxpayer’s assets that are affixed to land or an interest in land that is sold.  The proposed amendments should be clarified such that a taxpayer’s interest in real property does not include assets affixed to that property in relation to which another taxpayer is treated as the economic owner for the purposes of Division 40.

The retrospective amendments may have practical operation to historic sales of assets that are treated as TARP by virtue of the retrospective amendments, either where the ATO has issued a notice of assessment in relation to the income year in which the applicable CGT event happened and that income year is still ‘open’ to the ATO, or where the relevant foreign resident investor has not lodged an Australian income tax return for the relevant income year in relation to the disposal (on the basis that it was expected that the asset was not TARP and that there was no liability to Australian tax).  It seems to be an unintended outcome that the lodgement of an Australian tax return could influence the practical application of the retrospective amendments and one that should be clarified.

More generally, the repeated reference in the explanatory materials that the proposed amendments will clarify the ‘policy intention’ that certain assets were always intended to be within the foreign resident CGT tax base, which is used as justification for the retrospective effect of the ‘real property’ definition, is not consistent with the original explanatory memorandum for Division 855.  As was expressed by Hespe J in YTL, by the enactment of Division 855 there was an intentional narrowing of the classes of CGT assets gains on which were to be taxable to foreign residents.

Finally, as there is no change to what constitutes an investment in land for the purposes of the MIT rules, an asymmetry will arise whereby non-residents will be subject to tax on an exit from Australian renewable or other infrastructure investments but may not be able to access the concessional MIT withholding tax rates on distributions from those assets where those assets do not meet the current requirements to be an investment in land, which is primarily dependent on whether the relevant interest is real property.

Treaty override

The exposure draft includes an override to Australia’s double tax agreements to treat references to ‘real property’ or ‘immovable property’ in those agreements as references to ‘taxable Australian real property’.  

The amendment to the International Tax Agreements Act 1953 (Cth) will not apply retrospectively.  The explanatory materials provide that the treaty override amendment is proposed to apply in relation to a CGT event occurring on or after the date that the amendments commence. 

Future transitional provisions will need to be monitored to consider the application of treaty relief to the retrospective amendments. 

Principal assets test and IARPIs

Passing the PAT is one aspect of determining whether a non-portfolio membership interest held by a foreign resident is an IARPI.  At a high level, where the membership interest derives more than 50% of its value from TARP, the principal asset test will be satisfied.

Currently, the PAT is applied just before the happening of the relevant CGT event.  It is proposed to amend the PAT such that it requires testing throughout the period of 365 days before the time of the CGT event.

The amendments also require the value of mining, quarrying or prospecting information to be added to the value of TARP for the purposes only of applying the PAT and determining whether an interest is an IARPI.

Observations

From a practical perspective, this test may now be very difficult for taxpayers to administer.  This is the case particularly in the context of a membership interest held by a foreign entity that derives less than, but close to 50% of its value from TARP.  In this case, a foreign entity would need to monitor valuations and movements in the assets of the underlying entity daily to determine whether the PAT is satisfied on any particular day.

Foreign resident capital gains withholding declaration and notification regime

Currently, a non-resident vendor can provide a non-IARPI declaration to a purchaser and consequentially, the purchaser is not required to pay a 15% foreign resident CGT withholding amount on the payment of the purchase price.  A purchaser can, unless they know the declaration to be false at the time it is given, rely on it without having to make further inquiries.  There is no involvement by the ATO in this process.

Key proposed changes

Notification requirement

The exposure draft proposes new notification requirements to be satisfied for disposals by foreign resident vendors, who are making non-IARPI declarations, where the aggregated market value of the transaction is $50 million or more. The aggregated market value of a transaction will be assessed by reference to the value of any ‘related transactions’.  No guidance is provided as to what constitutes a ‘related transaction’ for these purposes.

At a high level, the notification requirements proposed by the exposure draft require a vendor to give notice to the ATO in an approved form that the vendor intends to make or has made a non-IARPI declaration.  This notice needs to be provided to the Commissioner:

• at least 28 days before transfer of the CGT assets, where the period between entering into the transaction and becoming the owner of the CGT asset is more than 31 days; or
• before, or as soon as reasonably practicable after, entry into the transaction, if the period between entry into the transaction and the purchaser becoming the owner of the CGT asset is 31 days or less. The ability to provide notice to the Commissioner before the transaction is entered into allows for simultaneous signing and completion.

The vendor must also notify the purchaser that the vendor has notified the ATO, and when that occurred.

A purchaser cannot rely on a non-IARPI declaration unless these requirements are satisfied by the vendor.

Purchaser reliance on a CGT declaration

The exposure draft also proposes to modify a purchaser’s ability to rely on a non-IARPI declaration provided by a vendor. 

In addition to not being able to rely on a non-IARPI declaration unless the vendor requirements set out above are satisfied, the exposure draft provides that a purchaser can only rely on a non-IARPI declaration if, at no time during the period from when the declaration was given to immediately before becoming the owner of the CGT asset, did the purchaser know or could reasonably be expected to know, that the declaration was false.

Observations

The $50 million threshold proposed in the exposure draft is an increase to the $20 million threshold proposed in the 2024 Consultation Paper.  The Consultation Paper also included an additional step in the notification process, where the ATO had the ability to intervene post notification and prior to settlement and recommend that a vendor declaration be withdrawn.  As foreshadowed in our Alert, this notification step would have created uncertainty that the ATO may reject a notice of a non-IARPI declaration close to completion, and how this may impact the agreed purchase price and whether the transaction will go ahead.  These changes are to be welcomed.

These amendments provide that a purchaser can only rely on a non-IARPI declaration where the vendor has complied with the new notification regime.  This places an obligation on a purchaser to be alert to the timing of the notification and completion.  Practically, we expect the ATO notification obligation will be dealt with by including in transactional documentation an obligation on the vendor to provide the notification in the prescribed form to the ATO.

As mentioned above, where the period between entry into the transaction and completion is longer than 31 days, the notice to the Commissioner needs to be provided at least 28 days before the transfer of the assets. 

The amendment regarding the knowledge requirement of a purchaser in respect of a non-IARPI declaration, combined with the amendments to the PAT and the vendor notice requirements, make compliance with this obligation onerous and costly.  It imposes a positive due diligence obligation on a purchaser to continually monitor whether a vendor satisfies the PAT right up to completion of an asset acquisition, and thus whether the non-IARPI declaration becomes false.  This also has the ability to impact the timing of completion of transactions.  For example, if a purchaser becomes aware just before completion that the PAT has been satisfied and thus that a non-IARPI declaration is false, it will need to apply for a payment reference number from the ATO to be able to process the withholding payment that the purchaser is now required to make.  If the purchaser completes without having made the required payment then it is liable for administrative penalties for failing to do so.

The EM contains examples of the type of diligence expected of a purchaser, including to document proportionate, customary checks (including reviewing ASIC / ABR extracts, transaction documents and residency disclosures), address obvious inconsistencies through routine queries, and retain records.  The due diligence performed in these examples will not provide insight into a vendor’s satisfaction or not of the PAT, and accordingly, are unlikely to provide comfort regarding the validity of the non-IARPI declaration.  In light of the explanatory materials, we consider that the language of the exposure draft may require a purchaser to undertake further levels of enquiry to avoid relying on a false non-IARPI declaration where the purchaser could reasonably be expected to know that the declaration was false.  Further guidance would be helpful.

Renewable energy asset discount capital gains for foreign residents

The proposed amendments mentioned above create tension with Australia’s net zero commitments and the fact that mush of Australia’s investment in the renewable energy space is by way of direct and indirect foreign investment.

After consulting with the renewable energy sector, Treasury has proposed a temporary 50% CGT discount for eligible foreign residents on disposals of Australian renewable energy assets and certain indirect interests in those assets.

The proposed concession would apply to CGT events happening from commencement until 30 June 2030 and is intended to operate as a targeted transitional measure as part of the broadening of the foreign resident CGT regime set out above.

Key proposed changes

The principal features of the proposed concession are:

• the 50% discount would only be available to foreign residents that are not individuals. This would include corporate entities and trustees of offshore funds with Australian renewables exposure;
• the CGT event must happen on or after commencement and by 30 June 2030;
• at the time of the CGT event, the asset must other be TAP;
• the asset must either be an ‘Australian renewable energy asset’ or an IARPI that passes the ‘renewable energy asset test’;
• the measure generally operates independently of the ordinary CGT discount rules, such that an entity could access this concession even if it would not ordinarily qualify for the standard CGT discount (including if the asset is held for less than 12 months, which is generally one of the requirements to be able to access the discount capital gains rules).

Direct disposals of Australian renewable energy assets

For direct disposals, the relevant asset must be an 'Australian renewable energy asset', which is defined to mean a CGT asset that:

• is TARP; and
• has 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 (Cth) (REA Act), whether the generation occurs now or in the future.

What is an eligible renewable energy source?

‘Eligible renewable energy source’ is defined under section 17 in the REA Act to include various types of energy derived from natural sources, including but not limited to, hydro, wind and solar.  However, the definition excludes the following energy sources:

• fossil fuels; and
• materials or waste products derived from fossil fuels.

Is the asset being used for the ‘primary purpose of generating or ‘directly facilitating’ the right kind of energy?

The ’primary purpose' requirement is a significant gateway condition.  Under the explanatory materials, a TARP asset will have the primary purpose of generating renewable electricity if it is used “predominately for the generating, or directly facilitating the generation of, electricity from an eligible renewable energy source, with ‘predominately’ meaning for more than any other purpose for which the asset is used”. 

In particular, a TARP asset that is only partly constructed, or where construction has not commenced, such as land with only an approval for development, will not on its face satisfy the primary purpose requirement unless the surrounding circumstances sufficiently and objectively demonstrate that its use is intended to be limited to renewable electricity generation. Again, absent any further guidance being released, this would seem to give rise to some uncertainty.

The table outlines some cases of assets being ‘in or out’ based on the explanatory materials and the REA Act.  However, there are clearly a number of ‘edge cases’ that may lead to uncertainty.  In particular, Treasury’s drafting and the reference to the REA Act indicates that as a starting point, eligible assets must be ‘specialist renewable assets’.  This may become problematic as Australia’s energy grid becomes increasingly complex, and renewable and traditional energy sources rely on shared infrastructure.

Treasury notes that objective evidence will assist in demonstrating that pre-development and development-stage TARP assets forms part of a renewable energy project, including land identified for the project, grid connection agreements, development approvals, or rights to future income under an offtake agreement.

Indirect disposals of Australian renewable energy assets

The proposal is also designed to apply to disposals of membership interests that pass the renewable energy asset test.  

Renewable energy asset test

Because the membership interests must be IARPI, the renewable energy asset test applies only after the entity has already passed the PAT under Division 855 (meaning that, in working out their position under the PAT, the taxpayer has already calculated that the market value of the TARP assets of the test entity).

Once that threshold is met, the entity’s TARP assets are essentially divided (on a look-through basis) into Australian renewable energy assets and ‘other taxable Australian real property’. This is a similar test to the way the PAT is applied.

A membership interest passes the renewable energy asset test if at least 90% of the test entity’s TARP value is attributable to Australian renewable energy assets.

Unlike the amendments to the PAT, the renewable energy asset test will not apply to the asset at any time during the 365 days that precede the CGT event.  Rather, it will continue to be a point in time test. While welcomed, this may also create confusion in the application of similar, but different, test.

Observations

This concession may be attractive for foreign corporate investors and foreign trust structures disposing of qualifying Australian renewable energy assets before 30 June 2030. That will be especially relevant for offshore infrastructure funds and other foreign investors in the renewable energy sector. 

There are, however, several practical constraints that mean eligibility will need to be tested carefully rather than assumed, and which will likely mean the availability of the concession, and the impact on the renewable energy industry, is limited.  In particular:

• development-stage projects may qualify, but only where the objective evidence clearly supports a genuine and sufficiently confined intended use for renewable electricity generation;
• assets with mixed or ancillary functions may turn on the 'primary purpose' analysis, which the explanatory materials indicate will depend on whether the renewable generation function is predominant over any other use;
• indirect exits will only qualify where the underlying TARP profile is overwhelmingly renewable, with at least 90% of relevant value attributable to Australian renewable energy assets. The explanatory materials state that this reflects the policy objective to target the discount to renewable energy infrastructure investments.  It’s not clear why such a high threshold has been set compared with, for example, a proportionate test (e.g. if only 50% of the value of an entity’s TARP assets were represented by Australian renewable energy assets, then 50% of any capital gain is subject to the 50% discount).  Further, general electricity transmission infrastructure (e.g. poles and wires) is not to be regarded as a renewable energy asset for the purposes of this measure.  Therefore, general transmission assets may impact the 90% market value threshold in an unfavourable way; and
• complex holding structures will require detailed look-through valuation work, and the valuation methodology must align with the PAT framework already used under Division 855.