14 August, 2016
On Budget Night 2016, FIRB released revised tax conditions that may be applied as part of the FIRB approval process.
Summary
On the night of the Federal Budget in May 2016 the Foreign Investment Review Board (FIRB) released revised ‘tax conditions’ that may be applied as part of the FIRB approval process.
The revised tax conditions are a significant improvement to the conditions released by the Treasurer on 22 February 2016, which had created considerable uncertainty.
Overview
One of the less publicised announcements on Budget Night was the revision by FIRB of the tax conditions released on 22 February 2016.1
The new tax conditions are a significant improvement, and should reduce most of the uncertainty and angst that the original tax conditions caused.
The new ‘standard’ tax conditions that may be imposed by FIRB are as follows:
1. Ongoing compliance with Australia’s tax laws – this obligation is limited to the FIRB 'action', and any transactions, operations or assets in connection with the assets or operations acquired as a result of the action. Importantly, this obligation can now be satisfied if the applicant has a 'reasonably arguable position' (ie, about as likely to be correct as not).
2. Requirement to provide information to the ATO – this is now limited to information the ATO can request under Australia’s tax laws.
An undertaking to pay outstanding tax debts – it is now explicit that this condition does not apply to '50/50' arrangements that are typically entered into when a taxpayer is in dispute with the ATO.
4. A notification obligation to FIRB to provide an annual compliance report and within 60 days after a termination event occurring – this report must now be provided by the due date for the tax return (rather than on each 12 month anniversary of FIRB approval).
Obligations are also imposed on the applicant’s 'control group', which links back to the Corporations Act test of control in section 50AA. This is significantly narrower than the tax 'associate' test that had previously existed, and should make it easier to comply with the tax conditions.
Additional tax conditions can still be imposed where particular tax risks are identified:
The applicant must engage in good faith with the ATO to resolve any tax issues in relation to this transaction and its holding of the investment. This may involve entering into negotiation on an Advanced Pricing Arrangement, obtaining a private ruling or notifying of transfer pricing and Part IVA issues. The main change is that the reference to the ATO being able to request that the structure be changed has been removed (but whether this is a substantive change remains to be seen).
The applicant must provide information as specified by the ATO on a periodic basis, including at a minimum a forecast of tax payable.
Other issues
There are a couple of other issues that applicants who have been, or about to go through, the FIRB process should bear in mind:
FIRB is still in the process of finalising further guidance on the tax conditions. While drafts have been circulated for consultation, the revised guidance will not be finalised until after the Federal election.
Applicants who had the old tax conditions imposed should ask FIRB to amend their FIRB approval so that the new tax conditions are instead imposed (in our experience, FIRB has been prepared to do this).
For joint applicants the question of joint and several liability arises, namely whether an applicant will be in breach of their FIRB tax conditions if its co-applicant has breached one of the tax conditions. Again, FIRB has been prepared to make it clear that joint and several liability does not arise for joint applications.
Finally, where FIRB approval is a condition precedent to a transaction, the contract should be carefully considered as to whether apurchasercanstillwalkawayfromthe transaction if they are unhappy with the
tax conditions.
FOOTNOTES
1. FIRB tax conditions in M&A deals – the current state of play.
For further information, please contact:
Toby Eggleton, Director, Greenwoods & Herbert Smith Freehills
toby.eggleston@greenwoods.com.au
