New tax on renewables won’t be retrospective, but will send “opposite message” to foreign investors

Federal government tax reforms targeting foreign-owned wind, solar and battery assets won’t be retrospective, industry has learned, but investor groups say there is still a lot to dislike about the proposal. 

The Albanese government is pushing ahead with its proposal to extend the 30 per cent capital gains tax (CGT) to include large-scale renewables, with legislation introduced to federal Parliament on Thursday.

The changes were foreshadowed in last year’s federal budget and a draft released in April, proposing a range of reforms broadening the types of assets subject to CGT for foreign investors, which most controversially would be retrospective. 

The new rules, however, don’t make the tax retrospective for renewables, and clarify what kinds of batteries are included. They also retain the original idea to offer a 50 per cent discount on the tax for the next four years.

But the four-year discount window and lack of grandfathering, which would have allowed current projects to be sold under the same tax terms as they’d been bought, are causing dismay. 

Clean Energy Investor Group (CEIG) chief Richie Merzian says the time-limited window for a lower tax hit encourages foreign owners, who make up the vast majority of investors in Australian renewables, to sell quickly.

“If you want the better of two rates then sell quickly,” he told Renew Economy. 

“It’s the opposite of the message we want to send, which is that Australia is a stable predictable investment destination that respects the long term timeframes necessary for major energy infrastructure.

“Given we know that international investment is crucial and is aligned with greenfield investment, which is struggling to get off the ground in the wind sector, we should be setting tax policy to align with the transition not just with forward estimates.”

In the absence of a grandfathering clause, he’d have preferred to see a 10-15 year period for the discount to align with the very long time periods it takes to get energy projects built. 

The Investor Group on Climate Change’s (IGCC) Frankie Muskovic called it a “bizarre act of self-sabotage” if the government went ahead of changes that “repel further investment in proven lower-cost renewable energy generation.”

“The government has taken a big step in the right direction by removing the risks posed by retrospective tax application, but they’re still setting Australia up as a high-cost market instead of inviting all investors to fund our new energy supply,” she said in a statement.

She told Renew Economy that the slow down in projects reaching final investment decision (FID) could be partly sheeted home to the uncertainty created by the tax changes, particularly when the retrospectivity angle was added in the April draft.

“The worry from our perspective is that given such a short offramp for investors to discharge their interest in existing projects, you could see an impact to valuations which could have consequences for new projects going through the pipeline,” she says.

“There has been a marked downturn in projects reaching FID.

“The reality we’re looking at is you will see an amount of global investment chilled with this legislation, and there’s not an easy replacement for that domestically.”

The changes are a response to two losses by the Australian Tax Office (ATO) in the federal court, which found that “real property” doesn’t cover things attached to land and therefore CGT can’t be charged on these sales. 

The new bill defines real property and while the government says it was always intending these to be taxed as such since Howard-era changes in 2006, won’t make the updates retrospective after vocal campaigns from industry groups. 

Last week, the Climate Capital Forum said on LinkedIn the changes “risks turning that tap off” from foreign investment 

“We risk sending signal that investing in Australia is risky and changeable for international investors,” the post said.

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