However the Treasurer insists the $425 million budget item is just a temporary transition measure while the tax regime is tightened for foreign investors. Last week’s federal budget confirmed that the government would “provide a time‑limited, targeted concession in the foreign resident CGT regime for investment in the renewables sector”, as part of its implementation of changes first announced in last year’s budget and detailed in draft legislation released last month. “This concession balances ongoing government support for Australia’s practical action on climate change, with
the need to ensure the tax treatment of these assets aligns with the treatment of other assets in the longer term,” the budget states. The measure, accounted for in the 2024-25 budget, is forecast to decrease tax receipts by $425 million over the next four years. It will be available to foreign investors selling certain renewable energy infrastructure assets from when the law is passed until June 30, 2030. Nationals frontbencher Kevin Hogan asked the Treasurer in Question Time on Wednesday why the Albanese government
was “introducing a 50 per cent capital gains tax discount for foreign multinationals investing in renewable energy projects, saving them $450 million, while taxing hardworking Australian mum-and-dad investors more”. Mr Chalmers replied that he was “referring the transitional arrangements in the renewable energy sector where we’re moving from a more generous treatment to a less generous treatment over time”. “So he’s not quite accurately representing the situation,” he said. “What we’re doing in capital gains for foreign investors is equalising the arrangement because it was
too generous for foreign investors. We’re making it more consistent with the tax paid by Australians. “And that means in some important areas of the economy, a transition from the existing arrangements to the new arrangements, just like the capital gains tax changes we announced last night, there are transitional arrangements there too.” Renewable carve-out By some, the Treasurer really meant “one” — renewable energy was the only sector to get a special carveout in the form of the temporary 50 per cent discount. “The
measure is explicitly framed as a capital attraction tool, albeit with an estimated $425 million revenue cost already provisioned,” law firm Baker McKenzie notes. The changes to the foreign resident CGT rules will drastically widen the net for collecting the tax from foreign residents, including by broadening the definition of “real property”, expanding when disposals of interests in an entity that holds Australian real property will be subject to CGT, and requiring pre‑completion notification to the Australian Taxation Office (ATO) for high‑value transactions. The law
firm said last month’s draft legislation “unexpectedly” revealed that the expanded “real property” definition would apply retrospectively to 2006, with no grandfathering rules for existing investments and limited transitional relief for certain renewable energy assets. “Foreign residents may face unexpected tax liabilities, despite ATO statements flagging an intention to limit reviews to transactions occurring in the past four years,” Baker McKenzie said in a client note. For the purposes of the 50 per cent discount, an Australian renewable energy asset “is defined as a CGT
asset that is itself taxable Australian real property, with the additional requirement that its primary purpose is to generate, or directly facilitate the generation of, electricity in Australia using an eligible renewable energy source”. “The ‘primary purpose’ requirement is that the asset be used predominantly for renewable energy electricity generation,” Baker McKenzie said. “This primary purpose test is particularly relevant for pre-development and development-stage assets. Land or infrastructure that is only partly constructed, or not yet constructed, will not automatically qualify unless the surrounding circumstances
objectively demonstrate that its intended use is limited to renewable electricity generation. “Objective indicators may include development approvals, grid connection agreements, or rights to future income under offtake agreements. “General electricity transmission infrastructure (such as poles and wires) is not regarded as being a renewable energy asset, whereas assets that are essential to the generation process, such as batteries used for grid-firming, may fall within the scope where they directly facilitate renewable generation.” Meanwhile, Tuesday’s budget papers do not reveal how much taxpayers could be
forced to cough up to investors if their renewable energy projects don’t pan out. The Australian government has announced it intends to enter into underwriting agreements, under its Capacity Investment Scheme (CIS), with a total of 75 renewable energy generation and storage projects to date. Launched in 2023, the CIS aims to attract investment to deliver 40GW of renewable capacity by 2030 to meet Labor’s 82 per cent renewable target by providing a revenue “safety net that decreases financial risk for investors”. “Under the terms
of these underwriting agreements, once the projects are built and operational, if the annual revenue earned by a project is below the agreed revenue floor, the Australian government will pay the project operator 90 per cent of the revenue shortfall up to the agreed annual cap for 15 years,” the budget states. “If annual revenue earned by a project exceeds the agreed ceiling, the project operator pays the Australian government 50 per cent of revenue above the ceiling up to the agreed cap. “The Australian
government’s maximum liability and estimated payments under these agreements are not for publication due to commercial sensitivities. While estimated payments are not for publication, they are reflected in the forward estimates from 2026–27. “Final payments will depend on future electricity prices and the resulting impact on project revenues. Any additional specific risks associated with this program will be reflected once further contracts are finalised and if it is determined that they meet the materiality threshold for inclusion.” Highest CGT in OECD It comes after the
Treasurer and the Prime Minister each left viewers less than impressed with their attempts at explaining why the capital gains tax discount was being removed for all assets, rather than just property. Anthony Albanese was accused of “talking in circles” after a word-salad answer to financial influencer Natasha Etschmann last week, while Mr Chalmers gave an apparent nonsensical answer to the same question on Insiders on Sunday. Capital gains tax is the tax you pay on profits from disposing of assets held longer than 12
months, including investments such as property, shares, businesses and crypto. It was introduced in Australia in 1985 as a major tax reform to treat investment gains as taxable income. Taxpayers pay capital gains tax at their top marginal tax rate, which for high-income earners is 47 per cent, minus the discount. The current Australian discount of 50 per cent was introduced in 1999. From July 1, 2027, the 50 per cent discount will be replaced with previous inflation-adjusted indexation method, which will strip out the
Assets purchased before the change will be taxed under both the old and new regime, with the cost base for calculating gains in the second period to be the asset’s value on July 1, 2027. Superannuation, main residences and new residential builds are the only assets exempt from the changes. Broadly speaking, the change means investors with lower gains relative to inflation will pay less tax, while those with large gains well above inflation — such as fast-growing businesses — will pay significantly more. Additionally,
a new minimum 30 per cent tax rate will apply on capital gains from July 1, 2028, ending the incentive for asset-rich but cash-poor Aussies to time the sale of assets for when they have little or no income to maximise their tax advantage. The minimum 30 per cent rate means those earning less than $45,000 will see their tax rate nearly doubled from 16 per cent. “Introducing a minimum 30 per cent rate will ensure everyone pays a fair share when they make a
capital gain,” the government said. “Income support recipients, including pensioners, will be exempt from the minimum rate.” With a top marginal tax rate of 47 per cent, the 50 per cent discount meant the maximum capital gains tax rate was capped at 23.5 per cent. The new indexation method removes that cap, meaning the maximum effective rate could rise towards the full top marginal rate of 47 per cent, depending on investment performance and rate of inflation. The Financial Services Council (FSC) said the new
method means Australia faces “potentially the highest effective CGT rate in the OECD”, ahead of Denmark (42 per cent), Chile (40 per cent) and Norway (37.8 per cent). The US has a maximum effective rate of 23.8 per cent, the UK 24 per cent and Canada 27 per cent. New Zealand does not have a capital gains tax.
CGT discount, renewable energy, foreign investors, Australia budget, capital gains tax, Jim Chalmers, energy policy