Treasury has released a consultation paper on the changes to the foreign resident capital gains tax (CGT) regime which were introduced by the Australian Government as part of the 2024-25 Federal Budget. The consultation paper states that the changes are aimed at ensuring foreign residents pay their fair share of tax in Australia, and to provide greater certainty for foreign investors by aligning Australia’s foreign resident CGT regime with international best practice.
The changes consist of three broad elements which will apply to CGT events that occur on or after 1 July 2025:
1) The clarification and broadening of the types of assets to which foreign residents are subject to CGT
This element aims to capture assets which derive their economic value from the use of Australian land and/or natural resources. Examples of assets that would now be captured include:
- Leases or licenses to use land in Australia including (but not limited to) pastoral leases and licenses;
- Australian water entitlements in relation to land in Australia;
- Infrastructure and machinery installed on land situated in Australia – this would potentially extend to renewable energy infrastructure such as wind turbines, solar panels, transformers and battery energy storage systems;
- Options or rights to acquire the abovementioned assets; and
- Non-portfolio membership interests in an entity (i.e. interests of 10% or more) where more than 50% of the underlying entity’s market value is derived from the abovementioned assets.
Currently, there is conflicting authority as to whether wind and solar farm assets constitute Australian real property (by virtue of being a fixture to the real property in question) or whether such assets are mere chattels. For CGT purposes, foreign investors have historically taken the position that CGT was not payable on the disposal of investments in these types of assets.
Depending on how the new legislation is framed, the proposed amendments may result in foreign investors being liable for CGT on a disposal of shares in a company, or units in a trust, where that company or trust owns Australian renewable energy generation or storage assets.
2) Amendment of the existing point-in-time principal asset test (PAT) to a 365-day testing period
- The PAT operates to test whether an entity’s underlying value is principally derived from Australian real property (which may now include wind and solar farm assets).
- Presently, the PAT operates at a point-in-time, being the time that the shares in the company, or units in the trust, are sold. In the Government’s view, the current approach presents an integrity risk as it allows foreign residents to avoid CGT by manipulating the timing of a sale of shares.
- This proposed change would ensure that the testing period for the PAT would be the previous 365 days before the time of the disposal of the shares/units, not merely at the time of disposal.
3) Requirement for foreign residents disposing of shares/units exceeding $20 million to notify the ATO
- This element imposes a requirement on foreign vendors disposing of membership interests that exceed $20 million in value to notify the ATO if they provide a vendor declaration to the purchaser.
- The ATO must be notified by the foreign resident vendor in the approved form in advance of a set review period (e.g. 28 days) before the CGT event or settlement.
- Transactions involving the disposal of companies or trusts which have a value of more than $20m will need to ensure that appropriate flexibility is built into the transaction timeline to ensure that a foreign resident vendor can comply with the notification requirements without delaying the transaction.
- The ATO will auto-issue a receipt number which must be provided to the purchaser. However, the ATO may also seek to take action (e.g. freezing orders) within the set review period if it takes the position that foreign resident CGT withholding should apply in relation to the transaction.
The consultation paper can be accessed here. The consultation period closes on 20 August 2024.
In addition to the consultation paper, Treasury has released draft legislation and explanatory materials for the 2023-24 Mid-Year Economic and Fiscal Outlook announcement (which will apply from 1 January 2025) and will:
- increase the foreign resident CGT withholding rate from 12.5% to 15%; and
- reduce the existing threshold that applies to CGT assets that are taxable Australian real property from $750,000 to $0.
For more information on tax changes for foreign residents investing in renewable energy, please contact Seema Sandhu or Matt Baumgurtel.
