ATO Refines Foreign Resident CGT Rules and Notification Process

Revisions to Foreign Resident Capital Gains Tax Regime

The landscape of taxation for foreign investors in Australia is set to undergo significant changes as the Government has put forth amendments to the foreign resident capital gains tax (CGT) regime. The move aims to clarify and expand the types of assets that will attract CGT for foreign residents. This includes broadening the scope to encompass assets with a close economic connection to Australian land, such as water rights and renewable energy assets, which previously may have been a point of contention.

In an effort to refine the taxation process, the principal asset test for indirect Australian real property interests will evolve from a single point-in-time assessment to a more comprehensive 365-day testing period. This change is anticipated to serve as a deterrent against tax avoidance by providing a more accurate reflection of an entity’s asset composition over time.

Additionally, a new ATO notification process will be introduced, compelling foreign residents to inform the Australian Taxation Office prior to executing transactions involving shares or membership interests valued over $20 million. This measure is particularly targeted at situations where the foreign vendor self-assesses that the interest does not constitute an “indirect Australian real property interest”. The exact timeline for this notification has not been disclosed, but it is clear that the ATO will need ample time to review and endorse the tax implications of any proposed sale.

These amendments are slated to take effect for CGT events occurring from 1 July 2025 onwards, with no apparent grandfathering provisions for pre-existing assets. This could potentially bring assets that were previously exempt from CGT into the Australian tax net. The Government has expressed intentions to engage in consultations later in the year regarding the implementation of these changes.

This overhaul is supplementary to the adjustments announced in the 2023-24 Mid-Year Economic and Fiscal Outlook. Those changes, effective from 1 January 2025, will see an increase in the foreign resident capital gains withholding tax rate from 12.5% to 15%, along with a reduction of the withholding threshold from $750,000 to $0.

Investors and stakeholders are advised to stay informed on these developments and consider their potential impact on future investments and transactions within Australia.

foreign resident CGT regime

Whats new in the foreign resident CGT regime from July 2025?

Starting July 2025, foreign residents will no longer be eligible for the main residence exemption under the CGT regime, potentially increasing their tax liability on Australian property sales.

Can the new foreign resident CGT regime prevent tax avoidance?

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