16 June, 2016
Amended tax conditions have been released
What you need to know
- The Government has published a revised set of tax conditions which may be applied to Foreign Investment Review Board (FIRB) approvals. The amended conditions are set out at the end of this Update.
- The amendments follow a period of consultation. Ashurst made submissions actively encouraging FIRB to amend and lessen the burden of the previous conditions.
- The amended conditions have addressed some of the concerns raised in our submissions and are less onerous for applicants.
- It does not appear that the conditions will be universally applied to every FIRB approval, although the circumstances in which they will be applied is yet to be clarified.
- A guidance note will be released shortly by FIRB to provide additional information on the amended conditions and their application.
What you need to do
- Foreign investors should obtain legal and tax advice before discussing any of the amended conditions with FIRB.
- If you have obtained a FIRB approval which is subject to the previously-announced tax conditions, you should seek professional advice as to whether to seek amendments to align them with the amended conditions.
Amended tax conditions in summary
On 4 May 2016, FIRB released revised "taxation conditions of certain no objection decisions". The original announcement and tax conditions released in February 2016 (see our Foreign Investment Update of 25 February 2016) appeared to indicate that standard tax conditions would be applied universally to all no objection approvals. The most recent Government announcement states that the conditions effectively target those foreign investors that pose a risk to Australia's revenue – which may suggest that the tax conditions will not be applied in all cases. We assume the application of the amended conditions will be clarified in the guidance note.
The conditions are now expressed to apply until a "termination event" occurs. A termination event occurs when the applicant ceases to hold the interest the subject of the notification; control the entity or business; or carry on the Australian business, which was the subject of the no objection notification.
These amended conditions do not automatically apply to investors who have already obtained approval with the previously announced tax conditions. FIRB has informed us that they are considering the position of those investors, and will provide
further guidance on this point.
Key amendments
- Under the original conditions, an applicant was obliged to ensure its associates complied with the conditions imposed. The revised conditions limit that obligation to those entities in the applicant's controlled group. The concept of control is defined by reference to the Corporations Act 2001 (Cth), which considers the practical control of the financial or operating policies of the entity. This new definition will significantly reduce the breadth of the application of the conditions, and will make compliance with the conditions more manageable.
- A carve out has been added to the requirement that the applicant comply with the taxation laws of Australia. It provides a safe harbour that an applicant does not breach the condition if entities in its control group have taken reasonable care to comply with the relevant taxation laws and have a reasonably arguable position. However, the safe harbour is limited and does not rule out a breach as a result of technical breaches of the tax law (such as late lodgement of tax returns or certain administrative and systems errors requiring tax return amendments). Hopefully, some of these concerns raised in submissions will be addressed in the guidance note.
- The information gathering condition has been clarified to apply to "any documents or information that is required to be provided" to the Australian Taxation Office (ATO) in accordance with Commonwealth taxation law and does not operate to provide a separate power granted to the ATO under the conditions.
- The obligation to pay all outstanding taxation debt has been clarified as covering only Commonwealth taxation debts. Further, this condition does not cut across any payment arrangement agreed with the ATO or where the ATO has exercised discretion to defer part or all of the payment of a disputed amount.
- There is no longer a requirement to notify the ATO of material transactions to which the transfer pricing and anti-avoidance rules may potentially apply. This has been replaced with a requirement to notify FIRB on undertaking the proposed action/acquisition and on a termination event (see new conditions 7 and 8 below).
- The period for the annual report on compliance with the tax conditions and the due date of the report is now to be aligned with the applicant's tax year and associated due date (this means there will be at least four months after the year end to file the report).
The additional conditions which may also be applied where a significant tax risk is identified in a particular case have not been amended. The drafting note accompanying these conditions, however, has been amended. The reference to the ATO requiring compliance with thin capitalisation requirements or changes to the structure of the takeover have been deleted. The note now refers to the reporting of information on certain transactions, eg those relating to transfer pricing rules or the Part IVA anti-avoidance rules.
A. Conditions that may apply until a termination event1 occurs:
The applicant must comply with the taxation laws of the Commonwealth of Australia in relation to the action, and any transactions, operations or assets in connection with the assets or operations acquired as a result of the action. An applicant does not breach this condition if it has taken reasonable care to comply with the relevant taxation laws and has a reasonably arguable position.
The applicant must use its best endeavours to ensure, and within its powers must ensure, that entities in its control group2 comply with the taxation laws of the Commonwealth of Australia in relation to the action and any transactions, operations or assets in connection with the assets or operations acquired as a result of the action. An applicant does not breach this condition if entities in its control group have taken reasonable care to comply with the relevant taxation laws and have a
reasonably arguable position.
The applicant must provide any documents or information3 that is required to be provided to the Australian Taxation Office (ATO) in accordance with the taxation laws of the Commonwealth of Australia in relation to the action and any transactions, operations or assets in connection with assets or operations acquired as a result of the action. These documents or information must be provided within the timeframe specified by the ATO.
The applicant must use its best endeavours to ensure, and within its powers must ensure, that entities in its control group provide any documents or information requested by the ATO in accordance with the taxation laws of the Commonwealth of Australia in relation to the action and any transactions, operations or assets in
connection with assets or operations acquired as a result of the action. These documents or information must be provided within the timeframe specified by the ATO.
The applicant must pay its outstanding taxation debt under the taxation laws of the Commonwealth of Australia, and must use its best endeavours to ensure, and within its powers must ensure, that entities in its control group pay any outstanding taxation debt under the taxation laws of the Commonwealth of Australia, which is due and payable at the time of the proposed action. This condition does not apply to payment arrangements agreed with the ATO or where the ATO has exercised its discretion to defer part or all of the payment of a disputed amount, to the extent that those arrangements are complied with.
The applicant must provide an annual report to the Foreign Investment Review Board on compliance with these conditions. The first report must cover the period from the date the action takes place to the end of the applicant’s income year for tax purposes. All subsequent reports must cover the applicant’s income year for tax purposes. If the action takes place less than 90 days before the end of the first income year, then that period can be incorporated in the next report. Each report must be provided by the due date for lodgement of the applicant’s tax return for that year.
The applicant must advise the Foreign Investment Review Board within 60 days of taking the action that it has done so.
The applicant must advise the Foreign Investment Review Board within 60 days of a termination event that the event has taken place.
1For the purposes of these conditions a termination event occurs:
a) when the applicant ceases to hold the interest the acquisition of which was the subject of the no objection notification;
b) when the applicant ceases to control, as defined in the Foreign Acquisitions and Takeovers Act 1975, the entity or business the control of which was the subject of the no objection notification; or
c) when the applicant ceases to carry on an Australian business the starting of which was the subject of the no objection notification.
2 For the purposes of these conditions, an applicant’s control group consists of entities:
a) that control the applicant (a controller);
b) that a controller controls; or
c) that the applicant controls, which includes for the purposes of these conditions an entity that is the subject of the application.
For the purposes of determining a control group, control has the meaning in section 50AA of the Corporations Act 2001.
3 This includes documents or information held, possessed or stored outside Australia.
B. Possible additional conditions for cases where a particular tax risk is 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.1
The applicant must provide information as specified by the ATO on a periodic basis including at a minimum a forecast of tax payable.2
1 Depending on the issues raised by the ATO this might include entering into the negotiation of an advance pricing arrangement or the obtaining of a private ruling with the ATO within a certain timeframe, the reporting of information as requested on certain transactions, for example, relating to the transfer pricing rules in Division 815-B of the Income Tax Assessment Act 1997, or the anti-avoidance rules in Part IVA of the Income Tax Assessment Act 1936. The relevant requirements would be included and tailored as appropriate in each case.
2 This could include a requirement to advise the ATO, and provide an explanation, of significant variations from the forecast of tax payable.
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For further information, please contact:
Murray Wheater, Partner, Ashurst
murray.wheater@ashurst.com
