Malaysian utility company wins CGT dispute with ATO

Last Thursday (30 October), the Federal Court of Australia handed down its judgment in YTL Power Investments Limited v Commissioner of Taxation, a case concerning the interpretation of tax laws for foreign residents.

The court ruled in favour of YTL Power Investments, determining that the firm’s transmission network lease assets were not “taxable Australian real property” and therefore not subject to capital gains tax (CGT).

The Malaysian utility company held 33.5 per cent shares in Australian company ElectraNet, which held an electricity transmission license and an electricity system control licence. ElectraNet also leased assets of Australian public utility company Transmission Lessor Corporation (TLC).

When YTL Power Investments disposed of its shares in ElectraNet in 2022, it made a capital gain of $947,738,854, which the Commissioner of Taxation sought to apply CGT to.

However, the taxpayer argued that Division 855 of the Income Tax Assessment Act 1997 (Cth) (ITAA 1997) stipulated that a capital gain should be disregarded if the taxpayer was a foreign resident and the relevant asset was not “taxable Australian real property”.

Grant Thornton said the court’s ruling in favour of the taxpayer has provided some clarity on the interpretation of ‘taxable Australian real property’ under Division 855 of ITAA 1997, and could influence legislative reforms clarifying foreign resident CGT rules.

"The YTL judgement is significant for non-resident taxpayers investing into Australia, as it clarifies that the technical meaning of the term 'real property' is based on common law, and not an ordinary meaning,” Liz McNamara, corporate tax partner at Grant Thornton, told Accounting Times.

“This is especially relevant for investors in the energy industry, as it is common to have licences created under State law, and this decision allowed State-based legislation (specifically s30 and Schedule 1 of the Electricity Corporations (Restructuring and Disposal) Act 1999 (SA)) to modify the principle that structures affixed to land ordinarily form part of the land for the purpose of applying Division 855.

“While this case adds valuable context to the Division 855 landscape, the legal terms of rights held and the drafting of State-based legislation is varied, so taxpayers should consider the application of Division 855 to their own particular set of facts and circumstances. The Commissioner may also still appeal."

The case hinged on three variations of the same question. Firstly, the court deliberated whether ElectraNet’s lease rights over transmission assets on land not owned by TLC or ElectraNet counted as ‘real property’ under Australian tax law.

It posed the same question for assets on land owned by TLC, and on land owned by ElectraNet itself. If the court found that any of these instances counted as real property, YTL Power Investments could have been subject to CGT.

The Commissioner argued that tax law intended to include structures physically affixed to land in its definition of ‘real property’.

He noted that under the former Division 136 of the ITAA 1997, which Division 855 replaced, non-residents were considered to have made a capital gain from the disposal of assets with a necessary connection to Australia, including land, a building or a structure.

The court rejected the Commissioner’s claim that the transmission lines counted as ‘real property,’ instead finding that section 30 of the SA Restructuring and Disposal Act treated infrastructure as ‘personal property,’ owned separately from the land.

As such, it found that leasing infrastructure did not give an entity ownership of the land, only rights over the infrastructure itself. As ‘real property’ and ‘personal property’ are mutually exclusive concepts under tax law, the court determined that YTL Power Investments’ assets were not ‘taxable Australian real property,’ and therefore not subject to CGT.

Grant Thornton noted that this case could reinvigorate government consultation to clarify the types of assets that foreign residents are subject to tax on.

In 2024, the government released a consultation paper that said statutory severance legislation in different states in territories resulted in inconsistent CGT outcomes, prompting a need for reform.

“The consultation paper proposes broadening the scope of the foreign resident CGT base to ensure assets with a close economic connection to Australian land and/nor natural resources are appropriately captured within the tax law,” Grant Thornton tax experts wrote in a recent insight.

“The consultation paper includes as examples of types of assets with a close economic connection to Australian land and/or natural resources to include (among others) infrastructure and machinery installed on land in Australia including wind turbines, solar panels, batteries, transmission towers, transmission lines and substations.”