Entity Setup
Entity Setup Case Study: Foreign-Resident Capital Gains Tax Reforms & What Businesses Must Do
With proposed non-resident CGT changes effective from 1 July 2025, foreign-owned companies and trusts need to understand new asset tests and notification obligations—learn how this affects entity structuring.
By NomadicTax Research Team • 5-8 min read • September 9, 2026
## Why This Reform Matters
In recent announcements, the ATO laid out **proposed amendments to the non-resident CGT provisions** in **Division 855 of the Income Tax Assessment Act 1997**—including **clarifying** and **broadening** what qualifies as taxable assets, tightening the **principal asset test** (to a 365-day period), and requiring **notification** to the ATO for share or membership interest disposals over **AUD 20 million**. These changes are proposed to apply to **CGT events** on or after **1 July 2025**. ([ato.gov.au](https://www.ato.gov.au/api/public/content/0-b12d922f-3ffe-47a6-a868-289919bcf50a?utm_source=openai))
These reforms aim to align Australia’s foreign resident CGT regime with OECD standards and ensure equitable taxation of foreign investors disposing of assets linked to Australian land. ([ato.gov.au](https://www.ato.gov.au/api/public/content/0-b12d922f-3ffe-47a6-a868-289919bcf50a?utm_source=openai))
## Key Elements in New Entity Setup Strategy
### 1. Asset types and structure
Evaluate existing entities holding:
- Residential and commercial property interests.
- Shares or membership interests in companies or trusts whose underlying assets are substantially connected to Australian real property (“TARP”).
Be aware the point-in-time principal asset test will now consider the proportion of assets derived from TARP over a **365-day period**, rather than spot valuations. ([ato.gov.au](https://www.ato.gov.au/api/public/content/0-b12d922f-3ffe-47a6-a868-289919bcf50a?utm_source=openai))
### 2. Notification obligation for large disposals
Where a foreign resident disposes of membership interests exceeding **AUD 20 million**, you must notify the ATO **before executing** the transaction. This adds new administrative obligations and potential scrutiny. ([ato.gov.au](https://www.ato.gov.au/api/public/content/0-b12d922f-3ffe-47a6-a868-289919bcf50a?utm_source=openai))
### 3. Residency and structuring impact
Foreign entities must consider whether they are “non-residents” and how the CGT regime applies. Where relevant, consider structuring holds through vehicles or jurisdictions to clarify whether entities are subject to new CGT rules—bearing in mind international tax treaties and avoidance rules.
## Example: Foreign Trust Holding Australian Property
Let’s say a foreign trust holds shares in a company that owns commercial real estate in Sydney. The trust is set to dispose of its holding worth $25 million in shares in mid-2026. Under the new rules:
- The asset is likely TARP through the company’s property holdings.
- The principal asset test over a 365-day period must show that the majority of asset value is derived from TARP.
- Since the disposal exceeds $20 million, the trust must **notify the ATO before the transaction is executed**.
- And the tax treatment on the capital gain will depend on whether it’s a CGT event from on or after **1 July 2025**.
Strategic structuring might consider partial sales, deferring disposals, or reconfiguring ownership so that holdings fall below notification thresholds. But risks include treaty anti-abuse or integrity provisions.
## Actionable Steps for Entities & Advisors
- **Asset audit**: identify all assets with potential TARP exposure; segregate non-TARP and TARP-proximate holdings.
- **Valuation history**: ensure records for daily or continuous valuations over the past year if applying principal asset test.
- **Transaction planning**: large exits may now require strategic timing, divestment in stages, or even reconsidering the entity holding structure.
- **Notify ahead**: for share/membership interests over AUD 20 million—rules mandate notification before execution.
- **Restructure**, if needed: consider mergers, trusts, or ownership via entities to reduce exposure—but always check treaty and anti-avoidance rules.
## Cautions and Practical Considerations
- These changes are **proposed**; as of the latest notices, they are **not yet law**, so careful monitoring of bill progress is important. ([ato.gov.au](https://www.ato.gov.au/api/public/content/0-b12d922f-3ffe-47a6-a868-289919bcf50a?utm_source=openai))
- Transitional provisions may apply, especially to previous interests and events around the 1 July 2025 date.
- Costs of valuation, compliance, and potential taxes need assessing against benefits of restructuring.
**Bottom line**: For non-resident individuals or entities with Australian real property exposure, the revised CGT framework demands forethought. Early action can reduce cost, risk, and surprise.