Background and Proposed Changes for Foreign Resident CGT
Australia proposes amendments to Division 855 of the Income Tax Assessment Act 1997 (ITAA 1997) that affect what assets foreign residents are subject to capital gains tax (CGT). Key proposals include:
- Clarifying which types of assets foreign residents are taxed on—including both direct and indirect interests in assets closely tied to Australian land. (ato.gov.au)
- Changing the principal asset test from a point-in-time check to a 365-day holding period test. (ato.gov.au)
- Requiring vendors to notify the ATO before executing transactions over AUD 20 million involving shares or membership interests, improving disclosure in foreign resident CGT withholding arrangements. (ato.gov.au)
These changes are proposed to apply to CGT events starting on or after 1 July 2025, but haven’t become law yet. (ato.gov.au)
Who Is Affected
- Foreign residents disposing of shares, membership interests or indirect interests connected with Australian real property.
- Sellers of high-value assets (over AUD 20 million) regardless of whether the underlying property is land or shares.
- Individuals or entities who cannot rely on the old definitions of “principal asset” without meeting a year-long test.
Practical Implications
Scenario 1: Foreign owner sells shares in a company that owns Australian property
Under current rules, if a foreign investor holds shares in a company whose main asset is land, they may trigger CGT under the principal asset test. After the proposed changes, the length of ownership (365-day period) plays a larger role, and earlier exemptions could be narrowed. Transaction value notification is also needed.
Scenario 2: Large-scale share sale over AUD 20 million
A vendor must provide transaction details to the ATO before executing the deal. Failure to notify could risk penalties or withholding.
What Foreign Investors Should Do Now
- Monitor legislation closely: these changes are not law yet—keep watch for when Division 855 amendments are passed.
- Gather documentation: keep records of acquisition dates, valuations, share-percentage ownership, and whether assets qualify as “principal assets”.
- Seek ATO clearance certificates: ensure any CGT withholding and clearance certificates are obtained in advance (for big deals) to avoid executed contracts being subject to withholding.
- Plan investments with holding periods in mind: since a consistent 365-day test is proposed, investors may adjust strategies to align with this period.
Comparison with Other OECD Jurisdictions
Countries like Canada and the UK employ more consistent asset holding tests and notify authorities for large transfers. These proposals align Australia closer to OECD norms—modernising the rules, but increasing compliance burdens.
Staying compliant through these proposed changes requires planning, good record keeping, and close attention to how future laws are enacted. Investors who fall in the crosshairs of these changes should be ready.