The proposed amendments introduce a new statutory definition of “real property”, and expand the definition of TARP to ensure more assets closely tied to Australian land are subject to CGT, and include the following:

Anything fixed to the land for the majority of its life, regardless of how it's treated under state or general law;
An expansion of the definition of real property rights to cover licences and contractual rights exercisable over land, such as agricultural or forestry leases and carbon farming rights;
The addition of mining, quarrying, and prospecting information to the value of underlying mining interests; and
The point-in-time “principal asset test” is replaced with a 365-day test. If an entity’s assets were principally TARP at any point during the preceding year, the interest is treated as taxable, making it much harder to avoid CGT by changing asset composition prior to sale.

This means that assets previously not considered real property – including physical assts that are fixed to land – may now be within the definition of TARP. This expanded classification can capture assets previously excluded such as solar farm equipment, batteries, utility infrastructure, and wind farm assets.

Particularly concerning is the fact that the new definition will apply retrospectively to CGT events occurring on or after 12 December 2006. The draft explanatory memorandum acknowledges the retrospective operation of the amendments, but considers only assets that constitute interests in land and fixtures that were statutorily severed under state or territory laws will be “substantively affected”. However, the retrospective application of the new definition reopens historical transactions processed in good faith, which undermines certainty and risks damaging Australia’s sovereign risk profile and reputation with foreign investors.

The retrospective amendments primarily impact foreign investors in infrastructure and energy assets who disposed of interests before the changes are enacted. These investors may now face unexpected tax assessments, penalties, and interest charges on the historic sales of CGT assets that were previously not subject to tax but would now be treated as falling within the new TARP definition.

Given the breadth of the amendments, potentially affected foreign investors should conduct a comprehensive review of all current Australian investments to determine if any assets now fall under the expanded definition of TARP, and examine all disposals of Australian assets since 12 December 2006 to identify any potential retrospective CGT liabilities.

Isabella Chin is a qualified CA, CTA and tax lawyer. She commenced her tax career with one of the “Big 4” accounting firms. She works with a diverse range of clients. Her areas of tax expertise include small business tax concessions, restructures, capital gains tax, and tax residency.

Tony Nunes has over 25 years’ experience in providing tax advice to clients, especially on issues affecting cross-border transactions, acquisitions and restructures, and on all aspects of structuring the ownership and financing of corporations and their operations.

GGI INSIDER No 125 May 2023

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