The Australian government on July 23, 2024 released details of its proposed changes to Australia's tax laws to ensure that capital gains tax is paid by foreign residents on the disposal of a broad range of infrastructure, property and mining related assets.
This initiative was first flagged in the federal budget on May 14 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".
As indicated, the Australian Treasury released a consultation paper entitled Strengthening the foreign resident capital gains tax regime (the consultation paper). This consultation paper provides, for the first time, more specific details on what the federal government is proposing to tax. The following types of assets would likely be within the expanded CGT net:
Leases or licenses to use land situated in Australia, including (but not limited to) pastoral leases and licenses;
Australian water entitlements;
Infrastructure and machinery installed on land situated in Australia, including telecommunications, transport and mining infrastructure;
Energy infrastructure, including renewables 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% of the underlying entity’s market value is derived from the above assets.
This represents a significant change to and expansion of Australia's CGT regime. For example, based on the current law (which is uncertain due to conflicting court decisions), many foreign resident taxpayers have concluded that Australian wind and solar farms are not ‘real property’ (and are not a fixture on real property) for Australian CGT purposes. Therefore, they have not paid Australian tax on the disposal of such investments (including disposals of companies or trusts that own such assets).
If the consultation paper’s amendments are made, 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.
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 CGT events commencing on or after July 1 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 principally 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 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 A$20 million (USD$13 million) to notify the Australian Taxation Office 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; and
Broadening the CGT regime to capture the sale by foreign residents of economic interests in taxable Australian real property (for example, by using a total return swap).
Consultation on the above measures is open until August 20 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 to reduce the FRCGW tax threshold from A$750,000 to nil. These two changes will apply from January 1 2025, assuming that the legislation is enacted in its current form.
