Australian tax change and the wind farm industry

Australian tax change and the wind farm industry from Chartered Accountants and Financial Planners | Hawthorn East, Melbourne | Accru Danby Bland Provan

By: Chartered Accountants and Financial Planners | Hawthorn East, Melbourne | Accru Danby Bland Provan  14-Feb-2011
Keywords: Accountants, Tax Consultants, Chartered Accountants

Ongoing international tax change

A review of Australia’s international taxation regime has been ongoing since 2002. Initiatives which have already been enacted out of this review include an exemption available to resident Australian companies on gains on sale of shares in a foreign company, a temporary resident modified tax regime, and the recent repeal of Foreign Investments Rules.

As part of this reform, new rules around how non residents are taxed on their Australian assets and a new definition of Australian capital gains tax (‘CGT’) assets were introduced in 2005. The objective was to bring Australia in to line with measures on offer in other countries, thereby making Australia more internationally competitive and more attractive as a base for regional headquarters.

As a result, Australian owned companies have a different CGT outcome than foreign owned companies when disposing of Australian CGT assets. A capital gain or loss made by a foreign resident from a CGT event can be disregarded unless the event relates to an asset that is taxable Australian property.

Broadly, taxable “Australian asset property” includes direct and indirect interests in Australian real property assets and the business assets of an Australian permanent establishment.

Impact on the wind farm development industry

The new tax rules have been designed to encourage inbound capital investment by only taxing non residents where there is a substantial investment in tangible real property in Australia. However as is often the case with tax reforms, not all eventualities are considered and there are implications for newer emerging industries such as wind farm development which are unique.

A critical aspect of developing a wind farm is to secure the site upon which the potential wind farm will be constructed. In Australia there are so many conditions that have to be completed before a wind farm site is viable and due to the high level of uncertainty in meeting these conditions, the typical arrangement entered into with a landlord is an “agreement to lease” rather than a lease.

A developer can spend a couple of years and substantial funds determining aspects such as the suitability of the land, the wind assessment which includes constructing  temporary meteorological masts, grid capacity and connection, turbine supply and pricing and finally securing a long-term power purchase agreement. Any one of these aspects is critical to the long term viability of a wind farm. If all elements do not come together, the developer has to be prepared to walk away from their investment and the agreement to lease with the Landlord lapses.

On the other hand, if the development is successful then the site is often on-sold to an infrastructure institution who actually enters into the lease with the landlord and builds the wind farm. The important point in this context is the tax consequences of the sale of the wind-farm site for the developer company who is in the business of identifying greenfield sites and developing them to resell: Is any gain going to be taxable as a revenue receipt rather than as a capital gain for CGT purposes?

Under a private ruling recently obtained, the ATO have taken the position that they would treat the sale of shares by a non resident in a wind-farm development company as the sale of Australian taxable assets under Division 855. This was due to the existing “agreement to lease” being treated as Australian real property, despite the fact that in the accounts of the developer the wind-farm site project costs would likely be expensed to profit and loss because the site is not at a point considered viable.

The policy objective behind Division 855 was to encourage inbound capital investment by relieving gains on investment in developing business assets by non residents. However wind-farm development certainly gets the rough end of the stick under this Division.

For overseas companies involved in alternative industry in Australia, it is always important to seek the advice of your accountant who is experienced in this sector before undertaking any major business transactions.

Keywords: Accountants, Chartered Accountants, Chartered Accounting Australia, Tax Consultants, Tax Management,

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