The investment thesis is asset specific
Data centres are a complex investment proposition. As with the discussion of funding models above, data centre investments may span a range of investment mandates depending on the structure of the transaction and the characterisation of the revenue profile and risks inherent in the chosen structure.
The investment thesis will vary with the lifecycle
Early-stage (or greenfield) developments typically appeal to sponsors and developers with a higher risk tolerance and sector expertise across a blend of traditional infrastructure and information and telecommunication developments. Legal risks at this stage often centre on land acquisition, environmental, planning and regulatory compliance, tenancy arrangements and customer contracts, construction and supply chain risks, as well as lender considerations and grid connection arrangements. Who these risks sit with will depend on the delivery model and whether these can be passed on to developers or to contractors.
By contract, operational assets (or established portfolios seeking to expand) tend to attract institutional investors, infrastructure funds and superannuation capital seeking stable cashflows and inelastic demand. These investors will usually seek stable input costs and revenue profiles via assets anchored by power purchase agreements, or captive generation and long term service agreements backed by quality credit. A premium for mature assets is currently being paid in the market to secure these relatively stable returns. Indeed, as we mention above at Section 1 (Energy considerations), data centre capacity demand is usually so stable that data centres are expected to be important for the stability of the grid until long-duration storage options mature.
Common investment considerations
Investors should be alert to the following high-level considerations:
- Operational continuity, as well as a potential mismatch between the projected data consumption demand curve and the realised trajectory.
- Ensuring that modelling assumptions are thoroughly tested, as well as ensuring there is a pass-through of rising energy costs and generation risk.
- A rapidly deepening market and the speed of technological advancement means that identifying quality assets is becoming more difficult (eg assets are now at varied lifecycle stages and significant capex expenditure can be required to align them with market expectations).
- Stranded capital risk:
- the intangible nature of data means data centre investors face a relatively higher risk of customer demand relocating to another location or jurisdiction (as compared to other hard infrastructure assets like roads or electricity generation infrastructure)
- the rapid pace of technological advancement can result in assets becoming obsolete or underutilised (for example, advancements in AI workloads or changes in data localisation laws or practices could render certain assets less competitive or non-compliant, leaving investors with sunk costs and limited recovery options).
Investors will place a premium on the resilience of a data centre's revenue model (ie one hyperscale client or multiple smaller clients), limiting financial exposure and maximising recovery options in the event of underutilisation.
Looking ahead to overseas market trends, our colleagues in the UK are also seeing that lease lengths are extending, and capacity uptake has increased eightfold in the last five years, from 5MW in 2019 to 40MW in 2024.1 If this trend is replicated in Australia, this may somewhat mitigate the risks associated with demand mobility.
As the data centre sector matures, a trend has emerged of segregating operational assets from those under development. This allows investors and funders to take exposure to different stages of the data centre life cycle: from a high-risk, high-reward construction proposition to a stabilised, yield-producing product.
As we mention above at Section 3 (Funding models and trends), lenders operating in the sector are becoming more flexible and the finance package will be dictated by whether the investment proposition has typical development characteristics, or infrastructure-link inelasticity.
Considerations on disposal
The flexibility of data centres as an investment proposition is also evident in the key considerations for investors on disposal. These considerations are generally similar, whether the investor is exiting at the culmination of a real estate development, or is returning/recycling capital as part of an infrastructure fund.
Typically, we see the following common challenges and risks in the disposal phase of the investment cycle:
- Identifying and attracting the buyer pool for a specialised asset class (although this risk seems somewhat alleviated by interest in the sector, for the time being).
- The challenge of securing a renewed income stream (if required).
- Regulatory/national security risk (FIRB, hosting approvals and security clearances to acquire critical infrastructure).
- Significant capital expenditure risk and potentially short asset lifecycle, given rapidly evolving technology and demand for data supply.
Unpacking the ATO's focus areas on data centres
The rapid growth of Australia's data centre market brings with it increased ATO scrutiny of the sector as a whole. The ATO has publicly highlighted its key areas of concern2 and is continuing to develop its positions on these and other relevant tax issues.
The ATO's focus on data centres coincides with its sustained allocation of significant resources to the private equity sector, as well as to multinational companies more generally. Further developments at the intersection of tax, private equity and the data centre market are expected, which may include the publication of industry-specific ATO guidance and an increase in audit activity.
A proactive approach to risk assessment and management, informed by a comprehensive understanding of the tax landscape, can deliver meaningful advantages for data centre owners, investors and users. Organisations that clearly understand their evidentiary requirements and maintain robust, contemporaneous evidence supporting their filed tax positions will be best placed to effectively manage interactions with the ATO.
Anti-avoidance rules
The ATO is examining whether certain structures used to invest in and operate Australian data centres may fall foul of Australia’s strict anti-avoidance rules, including the general anti-avoidance rule, the multinational anti-avoidance law and the diverted profits tax. Specifically, the ATO has raised concerns that some multinational groups are separating their Australian activities (including large-scale data centres) into different legal entities for the purpose of reducing Australian tax. When setting up structures, consideration should be given to the interaction of these rules with each of the other potential tax issues outlined below.
Permanent establishment risk
In accordance with double tax agreements entered into by Australia, profits attributable to an Australian permanent establishment will generally be taxable in Australia. A permanent establishment is generally defined in Australia's double tax agreements as being a fixed place of business through which the business of the foreign enterprise is carried on in whole or in part.
The ATO is reviewing arrangements to determine whether foreign entities have a fixed place of business in Australia through large-scale data centres. In some instances, the use of computing capacity in Australian data centres by a foreign entity could have significant, unintended consequences. Whether the use of an Australian data centre gives rise to an Australian permanent establishment for a foreign enterprise will depend on the particular facts and circumstances of each arrangement but may hinge on the level of access or control the foreign enterprise has over its data centre activities.
Royalty withholding tax
Arrangements involving the use of intangible assets are a current focus area for the ATO. In the context of data centres, the ATO’s focus is on payments made by Australian subsidiaries of multinational groups that it considers do not appropriately reflect the use or right to use IP or other intangible assets. These arrangements may result in an underpayment of Australian royalty withholding tax. In such cases, in addition to imposing royalty withholding tax, the ATO may also consider applying anti-avoidance provisions (including the general anti-avoidance rule and diverted profits tax).
Transfer pricing
The ATO has recently acknowledged that 'profit shifting disputes continue to dominate [its] audit program'.3 From a transfer pricing perspective, issues can arise as a result of diverging views on the value that Australian data centres provide to offshore groups. While some multinational groups characterise data centre operations in Australia as low-value services provided to the offshore group, the ATO considers that the Australian-based activities, infrastructure and physical presence of data centres represent a 'fundamental and valuable part of the broader enterprise',4 requiring higher profits to be taxed in Australia.
Footnotes
-
Rebecca Saint, Deputy Commissioner, Key Developments in tax administration in Australia, Speech delivered to PacRim Conference 14 June 2024, accessed at https://www.ato.gov.au/media-centre/key-developments-in-tax-administration-in-australia.
-
Rebecca Saint, Deputy Commissioner, Speech at the CPA Tax Forum 2025, Speech delivered to CPA Tax Forum 2025 13 August 2025, accessed at Speech at the CPA Tax Forum 2025 | Australian Taxation Office.
-
Rebecca Saint, Deputy Commissioner, Key Developments in tax administration in Australia, Speech delivered to PacRim Conference 14 June 2024, accessed at https://www.ato.gov.au/media-centre/key-developments-in-tax-administration-in-australia.