Proposed Changes To CGT Non-resident Withholding To Impact M&A Timetables

In brief

If the changes in the exposure draft are enacted:

• New ATO notification requirement: Vendors will need to notify the ATO when issuing a CGT membership declaration in transactions valued at $50M or more, a step not currently required and which will add a new compliance process between signing and completion.
• Buyers beware: Purchasers will no longer be able to accept a vendor's declaration at face value and will have to conduct active due diligence, shifting meaningful risk onto the buy side.
• Public M&A affected: Bidders may need targets to take a more active role in managing ATO notifications on behalf of shareholders, adding complexity and potential delay to deal timetables.

Background

The 2024-25 Federal Budget contained a somewhat vague (but relatively modest) announcement of a ‘clarification and broadening’ of the classes of assets in respect of which non-residents would be subject to Australian capital gains tax. This involved moving from the current ‘real property’ based test to include assets with a ‘close economic connection’ to Australian land. A consultation paper followed on 24 July 2024. Almost 2 years later on 10 April 2026 Treasury has released exposure draft legislation with a 2 week consultation period, seemingly to allow for legislation to be released in time for the 2026-27 Federal Budget on 12 May 2026.

For a full breakdown of the many issues relating to the exposure draft you can read our comprehensive briefing note here or listen to our podcast here.

Importantly, the exposure draft also includes changes to the non-resident CGT withholding rules for transactions which (when aggregated with related transactions) involve proceeds of $50 million or more, and which involve a declaration that a CGT asset is a membership interest but not an indirect Australian real property interest. The changes do not apply to a declaration that an entity is an Australian tax resident.

Broadly, under current law a membership declaration:

• enables the purchaser to not withhold from the purchase price under the CGT withholding rules unless they know the declaration to be false; and
• does not involve the ATO.

As a result of the declaration process being relatively painless under current law, it has become standard practice for declarations to be given in relation to share and unit sales involving non-residents, even where there is little doubt that the shares or units are not indirect Australian real property interests.

Under the exposure draft:

• for transactions with an aggregated market value of $50 million or more, the vendor will be required to notify the ATO that they are giving such a declaration to the purchaser within a specified period which begins at signing and ends immediately before the purchaser becomes the owner of the CGT asset (and, for periods of 31 days or fewer, the notification may be given before the period begins – i.e., before signing – to accommodate simultaneous signing and completion);
• the aggregated market value of a transaction will be assessed by reference to the value of any ‘related transactions’; the scope of which is not clear;
• the vendor must notify the purchaser that the vendor has notified the ATO, and when that occurred;
• the purchaser is only entitled to rely on the declaration if:
  • they do not know it to be false, and could not reasonably be expected to know it was false. This is a significant policy shift for purchasers who will now be expected to conduct active due diligence to satisfy the objective knowledge test rather than rely passively on vendor declarations, as they are able to do under the current law (in the absence of actual knowledge that a declaration is false);
  • the vendor has in fact notified the ATO, as required (the basis for this requirement is not clear, as it puts the purchaser at risk if the vendor does not notify the ATO, but indicates to the purchaser that it has notified the ATO); and
  • the vendor has notified the purchaser that the vendor has notified the ATO.

For public M&A transactions, market practice at present is that the bidder usually engages with the ATO to clarify the application of the withholding rules. Under the proposed rules, this may now require more active involvement by the target to manage the notification process with the ATO on behalf of relevant target shareholders. 

The exposure draft does not prescribe a process for the ATO to respond to notifications in relation to the making of declarations, but it would be expected (including based on the July 2024 consultation paper) that if the ATO had a concern about the correctness of a declaration it would notify the purchaser of that concern. The practical likelihood of the ATO erring on the side of caution and recommending a withholding position under the proposed framework is probably higher. It is not clear whether any avenue will exist for a taxpayer to be able to persuade the ATO in these circumstances that the underlying entity is not land rich.

What is even less clear is whether such notification by the ATO would, of itself, be expected to result in the purchaser being in a position where it could no longer rely on the vendor’s declaration as a basis on which withholding was not required (although, it is difficult to envisage a scenario whereby a well-advised purchaser would not withhold based on an ATO recommendation).

Herbert Smith Freehills Kramer has been actively involved in several submissions to Treasury on the exposure draft. Please feel free to reach out if you would like to discuss.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.