ATO Alert – Foreign Investment in Australia
Tax Law - 01 Sep 2020
Mischaracterised Arrangements and Schemes Connected with Foreign Investment in Australia
On 25 May 2020, the Australian Taxation Office (ATO) issued Taxpayer Alert (TA) 2020/2 outlining its concerns with cross-border transactions that mischaracterise the arrangement or scheme used by foreign investors to invest directly into Australian businesses.
Like many TAs, this TA is worded very widely and potentially applies to any inbound investments outside the vanilla debt or equity instruments and addresses the ATO’s concern that such arrangements are deliberately structured to avoid Australian tax that is payable on the return to the foreign investor or to obtain a tax deduction for the Australian entity.
All entities with inbound investment, or Australian entities with overseas parent entities, should consider the potential application of the TA.
Deciding whether a particular arrangement is within the scope of the concerns raised in the TA and deciding on the appropriate mitigation strategies is a sensitive exercise best entered into with your advisors.
What is the ATO’s focus?
The ATO is reviewing cross-border arrangements that purportedly mischaracterise the structure used by foreign investors to invest directly into Australian businesses, in circumstances that display any one or more of the following:
- The Australian resident entities are unable to obtain capital from traditional external debt finance sources on normal terms.
- The foreign investor either already participates in the management, control or capital of the Australian entity at the time of investment, or starts to participate in the management, control or capital as part of the investment.
- The investment has features not consistent with vanilla debt or equity investments.
- The investment may provide the foreign investor with direct exposure to the economic return from a particular business or assets exploited therein (whether ongoing profit or a gain on disposal).
As with the width of application, the potential tax advantage the ATO may seek to challenge is similarly wide. In addition to the above, the ATO is concerned that the investment may provide the foreign investor with a profit or gain by exploiting a specific business or asset.
The ATO will be reviewing the tax characterisation adopted by the taxpayer and test its appropriateness having consideration for the factual circumstances, relevant tax laws and applicable tax treaties.
What does this mean for you?
Where you have inbound financing that exhibits any of the features mentioned above, you should consider the likelihood that the ATO may seek to challenge the arrangement and potentially disallow deductions, impose interest or dividend withholding tax, impose collection obligations on the payer, apply the debt/equity test to recharacterize the arrangement, apply the thin capitalisation rules, apply the transfer pricing rules, assert that CGT events have been triggered or seek to trigger anti-avoidance provisions.
Here at ABA Legal Group, we have a dedicated team of domestic and international tax specialists that can review the arrangements in place and advise on the likelihood of ATO challenge. Working with you and understanding your levels of tax risk, we can develop a strategy to restructure any arrangements and draw on the expertise of our commercial and legal colleagues to implement this strategy.
Co-written by Steven Cantrill – Tax Manager
The information contained in this blog is general in nature and should not be considered to be legal, tax, accounting, consulting or any other professional advice. In all cases, you should consult with a professional advisor familiar with your factual situation for advice concerning specific matters before making any decisions. By reading this blog, you confirm your understanding of this disclaimer.