Foreign Resident CGT | New tax on renewable energy
20/08/2024
All foreign residents exiting Australia will face increased Capital Gain Tax (CGT) and administrative costs, particularly in the Australian renewable energy sector.
Australian Treasury released a consultation paper detailing proposed changes to the current foreign resident CGT regime which were raised in the last Federal Budget. Central to the proposed changes is:
- expanding the types of assets on which foreign residents are subject to CGT
- amending the principal asset test
- requiring foreign residents to notify the Australian Taxation Office (ATO) of certain disposals of shares and other membership interests
The changes will take effect from 1 July 2025. Owners of Australian renewable assets or land rich entities need to take immediate action to understand the impact of the changes to determine their exit cash flows.
The Current Regime
Currently, foreign residents can disregard capital gains or losses from a CGT asset unless the asset is “taxable Australian property” (TAP). Assets which are TAP include:
- taxable Australian real property (TARP)
- indirect Australian real property interests (IARPI) (e.g. shares or units in entities where the majority of the entity’s market value is from TARP)
A foreign resident will be taken to hold an IARPI where they hold a membership interest in an entity which passes both the:
- non-portfolio interest test (10% interest in the entity)
- principal asset test (PAT) where the market value of the entity’s property that is TARP exceeds the market value of its property that is not TARP
Purchasers of TAP from foreign resident vendors currently must withhold and remit 12.5% of the transaction proceeds to the ATO. Purchasers do not need to withhold this amount where the foreign resident has provided a declaration that the membership interests being disposed is not an IARPI.
The proposed changes in this alert are in addition to the Bill before Parliament to:
- increase the rate of foreign resident capital gains withholding from 12.5% to 15%
- remove the threshold of foreign resident capital gains withholding from 750,000 to nil
Proposed Changes
The consultation identifies 3 main proposed changes which would apply to CGT events occurring on or after 1 July 2025. The key changes are:
- clarification, and a broadening of the type of assets on which foreign residents are subject to CGT
- an amendment to the PAT to a 365-day testing period
- the additional requirement that foreign residents notify the ATO before disposing of shares and other membership interests exceeding $20 million
Broadening the types of assets
The change expands the CGT base for foreign residents to capture assets which have a “close economic connection to Australian land and/or natural resources”.
The proposed amendments would expand the following assets as TAP assets:
- leases or licences to use land in Australia
- water entitlements in relation to Australian land
- infrastructure or machinery installed on Australian land (e.g. solar panels, wind farms, batteries, rail networks or heavy machinery installed for use in mining operations etc.)
The proposed changes will significantly expand the CGT net for assets held by foreign residents and in particular tax non residents on renewable energy projects. Non residents are currently not subject to tax on these assets.
Amendment of the Principal Asset Test
The changes would extend the PAT to ensure that the market value of an entity’s property that is TARP does not exceed the market value of its property which is not TARP during the 365 days before the CGT event.
This amendment may prevent foreign residents from avoiding CGT by planning the sale of their membership interests once the underlying entity no longer meets the TAP. By extending the PAT to the preceding 365-days, the ability of taxpayers to manipulate the asset composition of the entity (e.g. through a corporate restructure immediately prior to the sale of membership interests) will diminish.
Some opportunities may arise from the expanded PAT such as non residents using capital losses previously foregone.
Foreign resident vendor ATO notification requirement
All foreign resident vendors must notify the ATO of a sale of shares exceeding $20m under the proposals – even where the shares are not an interest in Australian real property.
The ATO would need to be notified by the vendor prior to a set review period before the sooner of the relevant CGT event or settlement.
This change aims to prevent foreign residents from incorrectly declaring that their membership interest sale is not subject to CGT by giving the ATO visibility over such transactions. This is a compliance measure and would carry administrative penalties for false or misleading declarations.
Where the ATO disagrees with vendor’s declaration, the ATO can make a recommendation to the vendor and the purchaser to withdraw the declaration, such that withholding would apply to the transaction.
How SW can help
The proposals will take effect from 1 July 2025. Owners of Australian renewable assets need to take immediate action to understand the impact of the changes, determine the impact on their returns and reevaluate the timing of any exit strategy.
SW will continue to monitor the developments. Reach out to your SW contact to discuss how the proposed changes may affect your investment of transaction.
