The Australian Government has released draft legislation to strengthen the foreign resident capital gains tax (CGT) regime. The changes are intended to ensure foreign investors pay CGT on assets that are closely connected to Australian land and natural resources, and to close integrity gaps in the current law. Although these measures are still in draft form, they are expected to apply retrospectively meaning past, current and future transactions could be caught once enacted. Foreign investors with Australian assets should review their structures and exit plans now.
What is the Government changing?
1. More assets will be subject to Australian CGT
Under current law, foreign residents usually only pay CGT on a limited category of assets known as “taxable Australian property”, mainly Australian real property and certain land-rich entity interests.
The draft legislation broadens and clarifies these rules so that assets with a close economic connection to Australian land or natural resources are more clearly brought within the CGT net. This is intended to reduce uncertainty and ensure Australia can tax gains that economically relate to Australian land, even where the legal form is not traditional real property.
This change is particularly relevant for investors in:
- Infrastructure assets;
- Energy and renewable projects; and
- Natural resources and related structures.
Currently, Australian tax law does not define ‘real property’, leading to reliance on State and Territory laws that are inconsistent and often unclear. Recent tax cases such as YLT Power and Newmont exposed this limitation. This proposed policy change is a deliberate move away from asking ‘is this legally real property under general law’ toward ‘does this asset have a close economic connection to Australian land or natural resources’.
2. Indirect land interests will be harder to sell CGT-free
Foreign investors can currently avoid CGT on the sale of shares or units in an Australian company or unit trust respectively if, at the time of sale, the Australian company or unit trust does not derive more than 50% of its value from Australian land. The draft law changes this by replacing the current point-in-time test with a 365-day look-back test. Under the new approach, the sale of shares or units will be taxable if the Australian company or unit trust derived more than 50% of its market value from taxable Australian real property at any time during the previous 12 months.
3. New notification rules for large disposals
The draft legislation introduces a new compliance obligation for large foreign exits. Foreign residents disposing of non-indirect Australian real property interests worth AU$50 million or more would be required to notify the Australian Taxation Office (ATO) before completing the transaction giving the ATO greater visibility over significant foreign disposals involving Australian assets.
4. Transitional relief for some renewable energy investments
Recognising the impact on the renewable energy sector, the proposed changes include transitional relief, providing a 50% CGT discount for certain direct and indirect interests in renewable energy assets disposed of up to 2030. The discount is available only to foreign residents (i.e., foreign companies and foreign trusts) that are not individuals.
What should foreign investors do now?
Even though the legislation is not yet law, foreign investors should take preliminary action including:
- Review existing structures
- Identify assets that may now be considered to have a close economic connection to Australian land or resources.
- Reassess entity structures that rely on the current point-in-time land value test.
- Revisit exit strategies
- Planned disposals may produce different tax outcomes under the 365-day look-back rule.
- Timing alone may no longer be sufficient to manage CGT exposure.
- Prepare for new compliance obligations
- Large share or unit disposals may trigger ATO pre-notification requirements.
- Transaction timetables may need to be adjusted to accommodate this.
- Monitor final legislation
- Key details may change following consultation.
- Final commencement dates and transitional rules will be critical for transaction planning.
Key takeaway
The proposed changes represent a significant expansion of Australia’s foreign resident CGT regime. More assets will be taxable, more transactions will be reportable, and historic asset values will matter more than ever. Foreign investors and multinational groups with Australian land-related assets should seek advice early to understand how the proposed changes could affect future exits and restructures. Contact your local Moore Australia office today.
