Foreign resident CGT: real property definition and TARP; principal assets tax; vendor notification

By: Ian Murray-Jones

The Tax Adviser Misconduct Bill 2026 will implement previously flagged changes to the treatment of the foreign resident CGT regime.

Background

Under Australia's foreign resident CGT regime, introduced in 2006, the general rule is that foreign residents can disregard a capital gain or loss from a CGT event unless that CGT asset is taxable Australian property. Taxable Australian property encompasses 5 categories of CGT assets, relevantly: (i) taxable Australian residential property (TARP); and (ii) indirect Australian real property interests (IARPIs). IARPIs are membership interests in entities, the underlying value of which is principally derived from TARP.

There has been ongoing concern from governments that the CGT rules in this area were not working as intended (ie presumably not enough tax was being collected). This was mainly due to the fact that the term "real property" is not defined for income tax purposes, ie it relies on its ordinary meaning. In certain situations, State and Territory statutory severance laws sometimes classified major fixtures as chattels, eg mining infrastructure. The outcome was that no CGT would be paid in this instance.

Accordingly, the Government announced in the 2024-25 Budget that it would change the law: see 2024 WTB 19 [342]. A consultation paper was released in July 2024: see 2024 WTB 30 [558]. It then announced in the 2025-26 Budget that it would delay the start date for the proposed measures: see 2025 WTB 12 [203]. Finally, draft legislation was released in April 2026: see 2026 WTB 16 [267].

Definition of "real property" and TARP changes

The centrepiece of the proposed changes is undoubtedly the insertion of the definition of "real property" in s 995-5(1) of the ITAA 1997. This definition will apply across the income tax landscape, ie to other instances in the ITAA 1997, ITAA 1936 and TAA 1953, as well as the International Tax Agreements Act 1953.

The EM to the original Bill that inserted Div 855 into the ITAA 1997 (ie the Tax Laws Amendment (2006 Measures No 4) Bill 2006) made clear that the reference to real property was to "the ordinary meaning of that term". The EM to this legislation states that this ordinary meaning "was never intended to be affected by the operation of state and territory laws".

The new definition is intended to align with that in the GST Act, with modifications. Under the amendments, real property will include:

• any interest in or right over land;

• a personal right to call for or be granted an interest in or right over land;

• a licence or contractual right exercisable over or in relation to land (this is deliberately broader than the definition in the GST Act and includes rights to exploit land, such as forestry, water or data centre access licences); and

• a thing (or combination of things) fixed or installed on land whether or not it constitutes a fixture.

The EM includes worked examples illustrating that mining plant and equipment characterised as chattels under State law, and gas network infrastructure installed on private land, will now be TARP.

Changes to the principal asset tax (PAT)

By way of background, the PAT determines if a foreign entity's non-portfolio membership interest in an asset or interest holding entity is an IARPI and subject to CGT.

Broadly, the test is satisfied if the sum of the market value of the TARP assets held by the entity in which the foreign resident has a membership interest, exceeds the sum of the market value of its assets that are not TARP. In other words, more than 50% of the value of the entity's assets must be attributable to TARP for a membership interest in that entity to be an IARPI. Currently, the PAT operates as a point-in-time test, assessed at the time just before the relevant CGT event happened. This obviously gives rise to concern that foreign entities could alter the composition of an entity's assets immediately before a CGT event, to ensure that the PAT is not satisfied at the time of the event.

The Bill proposes to expand the PAT to apply to the asset at any time during the 365 days that precede the CGT event, up to just before the CGT event happens. The draft EM states that this aligns with the OECD standard.

In addition, the proposed amendments will require that the value of mining, quarrying or prospecting information (MQPI) be included when calculating the value of TARP assets for the PAT. While MQPI itself is not TARP, its value is inextricably linked to the corresponding rights (which are TARP) and must be assessed together.

Vendor notification requirements for high value transactions

Under the current law, a vendor may provide a non-IARPI declaration to a purchaser in order to avoid incurring foreign resident CGT withholding tax on the basis that the asset under the transaction is non-IARPI. Under the proposed amendments, for transactions with an aggregated market value of $50 million or more, foreign resident vendors disposing of membership interests must notify the ATO when making a vendor declaration to a purchaser that their membership interest is non-IARPI.

For these transactions, the non-IARPI vendor notification to the purchaser is not valid unless the notification to the Commissioner (in the approved form) has been made by the vendor within the required timeframes.

There are no proposed changes for transactions valued at less than $50 million.

However, the Bill proposes to also lower what may be termed the knowledge threshold for purchasers relying on vendor declarations across all transaction values. The current subjective test (the purchaser "knows" the declaration is false) will be replaced with an objective test, ie the purchaser must withhold if it could "reasonably be expected" that the declaration is false. This presumably places a higher onus on purchasers to conduct standard due diligence.

Note that the threshold had previously been flagged at $20 million in the earlier consultation document: see 2024 WTB 30 [558].

Date of effect

The amendments generally commence on the earliest of 1 January, 1 April, 1 July, or 1 October after assent.

In other words, the amendments to Div 855 generally apply to CGT events happening on or after the commencement date. However, and crucially, specific elements of the new "real property" definition (specifically those concerning interests in land and things fixed to land) apply retrospectively to CGT events happening on or after 12 December 2006.