Watt a relief! Capital gains relief for foreign investors in energy sector
03/12/2025
The Federal Court of Australia has handed down its decision in YTL Power Investments Limited v Commissioner of Taxation [2025] FCA 1317, ruling in favour of YTL Power (the Taxpayer) and holding that the infrastructure assets did not constitute real property.
The Taxpayer was successful in arguing that the leased electricity infrastructure situated on owned and leased land did not constitute “real property situated in Australia (including a lease of land)” and accordingly the shares disposed were not “taxable Australian property” (TAP). However, the Commissioner has already lodged an appeal of this decision.
Case background
YTL Power, a Malaysian based company, and a foreign resident, sold their shares in ElectraNet in February 2022. ElectraNet an Australian resident company, operated South Australia’s electricity transmission network on land that is leased and land that it owned.
The disposal of shares in ElectraNet triggered a $948 million capital gain which the ATO sought to tax. Under Australian law, foreign residents are only subject to CGT on gains from TAP. In YTL Power’s case, it was agreed that the gain would be taxable only if YTL Power’s ElectraNet shares was an “indirect Australian real property interest” under Item 2 of section 855-15. This essentially required ElectraNet’s underlying assets to be mainly Australian real property under the principal asset test in section 855-30.
In raising the income tax assessments, the Commissioner considered the leased assets to be “indirect Australian real property interest” and therefore Taxable Australian Real Property (TARP). The Commissioner’s arguments centred on the proposition for Division 855 to be interpreted in the broader context of its predecessor provisions Division 136, to determine what is real property. Further, the Commissioner argued that ‘real property’ in Division 855 takes on its ordinary meaning.
The Taxpayer argued that the network assets were legally severed from the land and should be classified as personal property, not real property. On this basis, the share should be non-TAP (NTAP) and not subject to income tax in Australia.
Federal Court decision
Hespe J agreed with the Taxpayer that the term ‘real property’ in Division 855 aligns with common law. This makes the state legislative severance rules critical in classifying the asset as real property or personal property. Importantly, this case was decided based solely on South Australian legislation. This could mean the same types of assets situated in another state may be real property depending on the state specific legislation.
In reaching this conclusion, Hespe J noted that the inclusion of ‘a lease of land’ in the definition of TARP indicates that ‘real property’ in this context has its technical legal meaning, which by itself would not cover leasehold interests. It followed that if a right or asset isn’t literally an interest in land (under property law), it shouldn’t be swept in by a broad ‘ordinary’ meaning.
We expect the Commissioner will appeal the decision given the amount of revenue at stake.
The broader ATO position on Division 855
Based on anecdotal evidence, the Australian Taxation Office (ATO) appears to have changed its view on whether infrastructure assets such as solar and wind infrastructure are considered to be real property, having previously regarded such assets as non-TAP. The ATO is also in a dispute with Newmont Canaca FN Holdings ULC regarding whether mining assets are real property. In Newmont, the Court rejected the Commissioner’s broad approach to the meaning of real property in another win for foreign resident taxpayers.
Changes to Division 855 announced in the 2024-25 Federal Budget were expected to broaden the scope of the provisions. However, in the Commissioner’s view, the proposed amendments to Division 855 merely clarified the scope of assets within the capital gains tax (CGT) net rather than broadened the type of assets that are caught by Division 855. Whilst the decision in YTL Power was influenced by specific South Australian legislation, the case supports the position that non-resident entities disposing of shares in companies owning infrastructure assets might not be subject to capital gains in Australia.
Importantly, comments made by Hespe J raise serious questions whether even the proposed amendments to Division 855 from the 2024-25 Federal Budget will be effective given the majority of Double Tax Agreements use the term immovable property rather than the extended meaning of real property in Division 855. Whilst the start date for the proposed amendments have already been pushed out, we would expect there to be further delays.
Practical considerations for taxpayers
In light of this decision, taxpayers should consider the below practical steps.
Review asset classifications
- If you are a foreign investor with Australian assets, identify how those assets are held and defined. Are they direct land interests, mining/lease rights, or something else?
- If your investment involves infrastructure, long-term leases, or statutory licences, investigate whether any law deems those assets personal property (as in SA) or if they are ordinary fixtures. This legal detail can be the difference between a taxable or non-taxable outcome on exit.
Documentation and valuation
- Ensure you have documentation that clearly shows the nature of your assets. In YTL Power’s case, the contractual agreements and the SA legislation were critical evidence.
- Maintain records such as leases, titles, regulatory provisions, and valuations of asset classes.
- If you plan to argue a CGT exemption based on the principal asset test, you’ll need robust valuations to show that less than 50% of the entity’s assets are taxable property. Contemporaneous valuations, e.g. of land vs equipment, at the time of a transaction can support your position if reviewed.
Be prepared for ATO’s approach
- While the Federal Court has set a clear precedent, the ATO may potentially appeal significant decisions or issue its own view in a decision impact statement. Without speculating on future litigation, taxpayers who benefit from this ruling should still present their position carefully to the ATO.
- If you rely on YTL Power for example in excluding a gain from your taxable income, consider disclosing your position or rationale to the ATO to mitigate penalties. Being proactive can show you are taking a transparent approach, which may help if the ATO decides to review the transaction.
Stay within anti-avoidance boundaries
- It’s worth noting that while structuring investments to fall outside the CGT net is legally acceptable, general anti-avoidance rules (Part IVA) still lurk in extreme cases. The SA law in YTL Power had commercial and historical justifications (it wasn’t created for tax avoidance).
- Ensure that any structuring of holdings has solid commercial rationale and isn’t purely contrived for tax purposes.
- If you have flexibility in how to structure an infrastructure investment, you might favour jurisdictions or methods that yield non-taxable outcomes – just ensure the structure aligns with genuine business operations and you’ve considered all tax angles.
- Don’t forget duties or GST, which can also be impacted by whether something is treated as land or not.
In summary, YTL Power clarifies the boundaries of what is taxable for foreign investors and should prompt a careful look at how your Australian investments are structured and defined in law. The case reinforces that clear, proactive planning, and understanding of legal definitions can prevent unintended tax exposure.
How SW can help
SW’s Corporate Tax team is experienced in advising foreign investors, infrastructure operators, and multinational groups on the evolving Australian tax landscape, particularly where complex asset classifications or cross-border issues arise.
In light of the YTL Power decision and the uncertainty surrounding Division 855 reforms, we can support you by:
- assessing how this ruling impacts your business
- advising you on upcoming transactions
- engaging with the ATO to manage potential disputes.
Whether you are planning a transaction, reviewing existing investments, responding to ATO scrutiny, or reassessing your tax governance framework, our team can help you navigate these developments with confidence.
Reach out to your SW advisor for support from our Corporate Tax team.
