Foreign Resident Tax Reforms – Renewable Energy Assets

The Australian government has released exposure draft legislation proposing to expand the scope of Australia’s capital gain tax (CGT) regime to ensure that foreign residents are taxed on the disposal of renewable energy assets (see our earlier article). The reforms are particularly significant for the renewable energy sector, where the characterisation of assets under general law has historically limited Australia’s taxing rights. In addition, specific concessionary rules were introduced for renewables assets to try and maintain the energy transition, albeit poorly targeted and subject to further revision.

Treasury has held a number of meetings concerning changes to the exposure draft legislation, with both narrowing and expansionary statements being made. As such, further amendments are anticipated and this article will be updated as the position develops.

 

“Real property” – Clarifying and broadening

Under the current law in Division 855 of the Income Tax Administration Act 1997 (Cth) (ITAA 1997), a foreign resident is not subject to capital gains tax on the disposal of assets unless the assets are “taxable Australian property”, which broadly include:

• taxable Australian real property (TARP), which include real property situated in Australia (including a lease of such land); and
• interests in entities, where more than 50% of the entity’s assets comprise of TARP.

Critically, the term “real property” is not currently defined in Australia’s tax legislation and has historically been treated to take its meaning from general law, including by the courts as well as the Australian Taxation Office (ATO) in numerous rulings and other guidance. In practice, this has meant that many renewable energy assets were not “real property” (and therefore not within the CGT net) on the basis that they were either chattels at common law or were statutorily severed from the land as a result of State/Territory statutory severance provisions.

The proposed changes introduce a definition of “real property” that significantly broadens the scope of the CGT regime. The term “real property” will include on a prospective basis:

1. any interest in or right over land (regardless of how that interest or right is treated for the purposes of any State or Territory law);
2. a personal right to call for or be granted any interest in or right over land;
3. a licence or contractual right exercisable over or in relation to land;
4. A thing (or combination of things) that is fixed or installed on land and is, or is reasonably expected to be, situated on the land for the majority of its useful life (whether or not it is a fixture at general law); and
5. a lease, licence or contractual right exercisable over a thing mentioned in paragraph (d).

There are no transitional measures associated with the expanded definition although we do discuss the CGT concession for renewables below.

The above definition will capture a wide range of assets including utilities infrastructure, transmission lines, substations, wind turbines, solar panels, large-scale battery energy storage systems (BESS) and heavy machinery. 

Importantly, paragraph (d) of the proposed definition uses the concept of “installed”, which is intended to take its ordinary meaning and include assets that are placed in position for use, even if not fixed to land or not yet operational. Further, the use of the words “combination of things” ensures that items which are attached to each other are also considered to be fixed or installed on land, provided that any one of the items is so fixed or installed. For example, where a mast is fixed to the land and the turbine is fixed to the mast, the entire wind turbine system may be treated as fixed to land.

 

Retrospective changes

A key feature of the proposed reforms is the retrospective expansion of TARP from 12 December 2006 (when Division 855 was first enacted). The term is extended beyond its general law meaning to include interests in land, as well as things (or a combination of things) fixed to land for the majority of their useful life, whether or not fixtures or treated in any other way for the purposes of any State law or Territory law or at general law, as well as a lease of such things. 

However, the retrospective definition is narrower than the prospective definition. In particular, it is limited to things “fixed” to land (and does not extend to assets merely “installed" on land like the prospective definition). In addition, Treasury have noted that this may be further narrowed to only fixtures (ignoring State severance legislation), meaning many renewable projects should be able to maintain the position previously adopted.

Notably, no transitional or grandfathering relief is proposed. This creates uncertainty for foreign investors in renewable energy projects, many of whom have historically treated wind turbines, solar panels and BESS as outside of the CGT net.

The ATO has released a statement indicating that it will generally limit its compliance activity on disposals that are currently subject to review or have occurred in the past 4 years, and that it will not conduct reviews on disposals older than 4 years, unless they come to their notice for other reasons (e.g. via ruling requests).

The proposed treaty-related amendments (explained below) are not retrospective, meaning the impact of the retrospective changes may be limited where treaty protection is available. However, we understand that Treasury are revisiting this position.

 

Treaty override

The exposure draft legislation also introduces a treaty override to Australia’s tax treaties to provide that references to "real property” or “immovable property” by reference to Australian law are taken to mean TARP as defined under the ITAA 1997. The definition of “real property” in Australia’s tax treaties is not uniform, and the practical effect of this change may impact some treaty countries more than others.

 

50% CGT discount for renewable energy assets

A limited 50% CGT discount is available to non-individual foreign residents (e.g. companies, trustees of foreign trusts) for the disposal of “Australian renewable energy assets” on or before 30 June 2030. It applies to:

• direct disposals, where the asset is an “Australian renewable energy asset”; and
• indirect disposals (i.e. shares or units), provided at least 90% of the underlying value of the relevant entity’s TARP assets is attributable to “Australian renewable energy assets”.

An "Australian renewable energy asset” is an asset that is TARP and that has the primary purpose of generating, or directly facilitating the generation of, electricity in Australia using an eligible renewable energy source (within the meaning of the Renewable Energy (Electricity) Act 2000 (Cth)). This should capture common renewable energy assets used in solar and wind projects. BESS are also within scope, but only where they are “essential for the generation of renewable electricity”, for example grid-firming BESS systems. Therefore, whether standalone batteries are captured is less clear cut. The uncertainty regarding the treatment of BESS under the proposed new laws is not surprising given that similar issues have arisen in Europe in relation to the tax treatment and characterisation of BESS and whether it can be characterised as a generation asset.

Importantly, the concession is not limited to operational assets. Pre-development, development stage and temporarily dormant projects can qualify, provided the surrounding circumstances sufficiently and objectively demonstrate that the use is intended to be limited to renewable electricity generation. However, general electricity transmission infrastructure (i.e. poles and wires) is expressly excluded.

Submissions have been made to extend the period beyond 2030, however it is not certain these submissions will result in any changes.

 

365-day test

The proposed reforms also significantly broaden the operation of the principal asset test for indirect disposals. Currently, the test is applied at a single point in time just before the disposal to determine whether more than 50% of the value of an entity’s assets is attributable to TARP. Under the draft legislation, this testing window is extended to the 365 days prior to the disposal, meaning an interest will be caught if the 50% threshold is exceeded at any time during that period. 

 

New ATO notification requirement

The exposure draft legislation also introduces a new ATO notification requirement for disposals of membership interests with an aggregated value of AUD50 million or more.

 

Commencement

The new measures will apply to CGT events occurring from the first 1 January, 1 April, 1 July or 1 October after the legislation receives Royal Assent. Based on the legislative process and intent, 1 July 2026 is currently expected to be the operative commencement date. However, the retrospective amendments will apply from 12 December 2006.