Australia Targets Foreign Resident Capital Gains Tax Rules with 365-Day Principal Asset Test

(AUSTRALIA) — Australia’s federal government has proposed changes to capital gains tax rules that would widen the foreign resident CGT regime and foreshadow domestic reforms to negative gearing and the general CGT discount in the 2026-27 Federal Budget.

Treasury has released exposure draft legislation for foreign residents, while the Albanese government plans to set out domestic tax changes in the budget due next week from May 11, 2026. The two tracks reach different investors, but both go to how gains from property and related assets are taxed.

The foreign resident draft would expand the tax net beyond Taxable Australian Property, or TAP, clarify the meaning of real property, add a new reporting rule for large disposals and create a temporary discount for some renewable energy holdings. The domestic package, which the government has linked to housing affordability and “generational fairness,” is expected to address the CGT discount, negative gearing and trust distributions.

Treasury tied the foreign resident proposal to the 2024-25 Federal Budget announcement on May 14, 2024. The draft broadens “real property” in line with the Australian Taxation Office’s longstanding administrative view and applies that clarification with partial retrospectivity to December 12, 2006.

One of the most closely watched changes is the 365-day principal asset test. It would replace the current point-in-time test for foreign residents disposing of membership interests, including shares, in entities with Australian assets.

Under the draft, gains would be taxed if Australian real property, including indirect interests, exceeds 50% of the entity’s assets over any 365-day period in the previous 3 years. A taxpayer would have to show the threshold was not breached at any point; failure would mean 100% of the gain is taxed.

That change would alter the practical burden in disputes over asset composition. Instead of testing the balance of assets only when the disposal occurs, the proposed foreign resident CGT regime would look back across a rolling three-year window and capture any period in which Australian real property tipped above half the value of the entity.

Treasury also proposes a notification rule for large transactions. Foreign residents would have to notify the ATO before executing disposals of shares or membership interests valued at more than $50 million.

The requirement targets timing as well as value. The draft says the notice must come before execution of the disposal, adding a reporting step for foreign investors selling sizeable corporate interests connected to Australian assets.

A separate measure would give a temporary 50% CGT discount to non-individual foreign residents disposing of Australian renewable energy assets, or interests in entities whose TAP value is at least 90% renewable assets. Treasury did not set an end date in the draft.

That discount sits alongside the tougher foreign resident tax base measures rather than replacing them. Treasury said the package aims to expand the tax base, increase reporting and support renewable investments.

The draft is not yet law. Treasury set the consultation deadline at April 24, 2026, and the ATO said it does not expect major changes to its existing compliance approach.

If Parliament enacts the legislation, the application date would be tied to the quarter after royal assent, with CGT events captured from 1 January, 1 April, 1 July or 1 October, as set out in the 2025-26 Budget. The retrospective features are framed as confirmation of ATO practice without reopening most past settlements.

Domestic reforms remain less defined, but the government has flagged changes in the May budget that would affect investors in housing and other assets. Prime Minister Anthony Albanese and Treasurer Jim Chalmers have linked the measures to affordability pressures and intergenerational access to housing.

At the centre of that package is an expected overhaul of the general CGT discount. The current regime gives individuals, partnerships and trusts a 50% discount on gains from assets held for at least 12 months, and speculation has focused on a cut to 25%, which would mean taxing 75% of the gain, though the government has not yet released the final design.

Superannuation funds would keep their 33.3% discount, and small business concessions would remain unchanged. The budget package is also expected to curb negative gearing by limiting deductions for investment property losses against non-investment income while allowing that treatment for new dwellings.

Losses under the proposed negative gearing changes would instead be offset against same-year investment gains or future gains on those assets. The government also plans new trust taxation rules targeting distributions.

Chalmers said the plan is “not about pitting old against young” and described the goal as giving younger Australians a “stake in the housing market.” The government has indicated the domestic changes would apply to future investments, while grandfathering for pre-budget assets remains under discussion.

Budget details are expected on or around May 13-20, 2026. The plan echoes Labor’s 2019 policy, which the Parliamentary Budget Office costed on the basis of implementation from January 1, 2020, though that earlier proposal was never enacted.

Australia’s current capital gains tax framework dates back decades. General CGT rules began on September 20, 1985, the 50% discount for individuals started on September 21, 1999, and assets acquired before 1985 are generally exempt.

The proposed changes would split attention between two groups. Foreign investors with recent or planned disposals now have an exposure draft that reshapes the foreign resident CGT regime, especially through the 365-day principal asset test and the $50 million notification trigger, while domestic investors are still waiting for the budget to show how far the government will go on capital gains tax concessions and negative gearing.

That leaves the next steps on separate timetables. Treasury’s draft sets out the architecture for foreign resident rules that have not yet passed into law, and the budget due within days is expected to decide whether the broader political fight over capital gains tax and housing tax breaks turns into legislation.