Proposal to broaden Australian tax on renewable energy generation, storage and transmission infrastructure

The Australian Government has now released details in a Consultation Paper of its proposed changes to Australia's tax laws to ensure that capital gains tax (CGT) is paid by foreign residents on the disposal of renewable energy generation, storage and transmission infrastructure. This initiative was first flagged in the Federal Budget on 14 May 2024, when it was announced that legislative amendments will be introduced to "clarify and broaden the types of assets that foreign residents are subject to CGT on".

On 23 July 2024, the Australian Treasury released a consultation paper entitled "Strengthening the foreign resident capital gains tax regime" (Consultation Paper). This Consultation Paper provides, for the first time, exact details on what the Federal Government is proposing to tax. The proposal is broad and targets infrastructure across numerous sectors (including transport, telecommunications and mining), but specifically in relation to renewable energy, foreign investors will be taxed on the disposal of the following assets:

• Energy infrastructure, such as wind turbines, solar panels, batteries, transmission towers, transmission lines and substations;
• An option or right to acquire one of the above assets (or similar asset types with a close economic connection to Australian land and/or natural resources); and
• A non-portfolio membership interest (of 10% or more) in an entity where more than 50 per cent of the underlying entity’s market value is derived from the above assets.

This represents a significant change to Australia's CGT regime and one which will likely have a material impact for sponsors of, and investors in, Australian renewable energy and broader sustainability projects and assets.

Based on the current law (which is somewhat uncertain due to conflicting Court decisions), many foreign resident taxpayers have taken the view that Australian wind and solar farms are not "real property" (and are not a fixture on real property) for Australian CGT purposes and, therefore, have not paid Australian tax on the disposal of such investments (including disposals of companies or trusts that own such assets). If the amendments are made as proposed in the Consultation Paper, it is likely that a disposal by a foreign taxpayer of a company or trust that owns Australian renewable energy generation, storage and transmission infrastructure will be subject to Australian CGT and, further, the Purchaser will be required to withhold an amount from the purchase price on account of 'foreign resident capital gains withholding' (FRCGW) tax.

These changes are proposed to apply to agreements entered into on or after 1 July 2025. The Consultation Paper is not seeking feedback on the broadening of the nature of assets that are subject to CGT, but rather is seeking feedback on other related reform proposals. A high-level overview of the other matters addressed in the Consultation Paper is as follows:

• Amending the principal asset test (PAT) from a point-in-time test to a 365-day testing period. Broadly, the PAT is used to determine whether more than 50% of the market value of an entity's assets relates to taxable Australian real property.
• Requiring foreign residents who dispose of shares or other membership interests (such as units) with a value of more than AUD20 million to notify the ATO in an approved form prior to the transaction being executed (this notification requirement is aimed at transactions where a declaration is being made by the Seller that it is not selling an 'indirect Australian real property interest' and therefore is not subject to tax).
• Broadening the CGT regime to capture the sale by foreign residents of economic interests in taxable Australian real property (eg by using a total return swap).

Consultation on the above measures is open until 20 August 2024.

Finally, concurrent with the above Consultation Paper, Treasury has also released exposure draft legislation to increase the FRCGW tax rate from 12.5% to 15%, and also to reduce the FRCGW tax threshold from AUD750,000 to nil. These two changes will apply from 1 January 2025, assuming that the legislation is enacted in its current form.