Australia's $27.9 billion income earned from US assets, mostly from equities, could lead to a $3.7 billion in annual taxes being applied to the country if US proceeds with its proposed law to tax income from US assets held by countries with 'discriminatory' tax policies, according to a Thursday report by Westpac.

Australia holds AU$1.5 trillion in US assets, about 36% of its offshore investments, making it highly exposed to US policy changes as Australian laws like Multinational Anti-Avoidance Law (MAAL) and Diverted Profits Tax (DPT) might trigger inclusion under Section 899, the propsed law by the Trump administration, the report added.

While the US holds around AU$1.4 trillion in Australian assets or 27.3% of Australia's liabilities, Australia still has a net positive investment position with the US, meaning any new taxes will impact Australian returns more than US investors, per the report.

The bank believes the tax would lower after-tax returns on US assets, potentially prompting Australia to reallocate capital to other countries, although this could result in lower risk-adjusted returns given the relative attractiveness of US markets.

While Australia is relatively insulated from US tariffs, taxes on investment income can lead to immediate shifts in capital flows, potentially causing rapid market volatility and disruption to Australia's financial position, according to the report.

The bank also noted that the new law may push global capital to look beyond the US, and Australia could benefit by attracting more investment, particularly in renewable energy, supporting its goal to reach 82% renewables by 2030.