‘Time will tell’: how foreign resident tax changes impact Australian sovereign risk

On 10 April, Treasurer Jim Chalmers opened the Treasury Laws Amendment Bill 2026: Renewable Energy Asset Discount Capital Gains For Foreign Residents to consultation, which closed two weeks later.

Holding Redlich partner Dhanushka Jayawardena (pictured) has told Accounting Times that the explanatory memorandum (EM) accompanying the bill introduces ambiguity for practitioners advising clients looking to invest in Australian renewable energy assets.

The bill proposes retrospective application of its broadened definition of taxable Australian real property (TARP) backdated to 12 December 2006.

“We're in a position where we cannot constantly advise a client about their position on a transaction that has already settled, which is a very unusual position to be in the context of Australia's political and legal environment,” Jayawardena said.

The bill’s notification regime, which requires the vendor to complete a declaration to both the ATO and the purchaser, introduces a compliance burden for foreign investors, as well as the proposed 365-day asset testing period.

He warned that although the government is offering a 50 per cent concession for foreign investment in Australian renewable energy assets, it requires them to meet a 90 per cent test.

“The nine times ratio requires that at least 90 per cent of the relevant [TARP] value of the test entity be attributable to Australian renewable energy assets,” the EM reads.

“The targeted nature of this threshold reflects the policy objective to target the discount to renewable energy infrastructure investments,” the EM reads.

The Treasurer, in his memorandum, also said that eligibility for the discount under the Primary Purpose Test for the concession requires that “the asset is an Australian renewable energy asset; or the asset is a membership interest that passes the renewable energy asset test.”

The EM defines an Australian renewable energy asset as “[having] the primary purpose of generating, or directly facilitating the generation of electricity in Australia using an eligible renewable energy source”.

It adds that a “partly constructed” or “land with only an approval for development” will not comply unless “the surrounding circumstances sufficiently and objectively demonstrate that its use is intended to be limited to renewable electricity generation”.

The four-year time frame to become eligible for the 50 per cent CGT discount by entering into a qualifying project before 30 June 2030 is insufficient, Jayawardena said, despite the government saying that it works based on its modelling.

“The retrospectivity of these changes severely undermines that position. It creates uncertainty for any foreign investor holding Australian property, infrastructure, resources, and assets,” Jayawardena said.

In his announcement of the draft legislation, Chalmers said: "Clarifying the interaction with state and territory laws reinforces the original intent of the law and ensures that the CGT treatment for assets held by foreign investors applies consistently, regardless of which state or territory the asset is located in.”

"This will protect revenue by ensuring foreign residents disposing of an interest in large-scale infrastructure assets that are fixed on Australian land are subject to CGT. This includes buildings and energy, transport and telecommunications assets," Chalmers added.

With the changes aimed at bringing Australia closer to the foreign investor tax treatment under the OECD Model Tax Convention (Article 6), the Treasurer added that it "reflects the government’s commitment to improve tax fairness and make the budget more sustainable.”

Chalmers also said that new arrangements aim to strike the right balance between "supporting investment in clean energy while ensuring foreign investors pay their fair share of tax”.

"The government continues to support productivity-enhancing investment, including in the renewable energy sector," he said.

The changes are yet to be finalised, and Jayawardena remains cautious considering the potential impacts on Australia’s sovereign risk.

“I guess the real kind of question is: Are these tax changes going to undermine Australia as an attractive destination for this capital? Time will tell.”

In the face of its two-week consultation that ended on 24 April, Jayawardena said: “Given how far these changes apply … that is a very short window.”

“The Bill commences on the first 1 January, 1 April, 1 July or 1 October to occur after the day the Bill receives Royal Assent,” the EM reads.