Conventus Law

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19 September, 2018

 

We outline the key Australian income tax developments in the last month affecting your business, including a revised guidance note issued by FIRB in relation to tax conditions for foreign investment approvals.

 

Top 5 developments in tax this month you need to know

RELEVANT AREA AT A GLANCE
Measures to tighten the thin cap rules

As announced in the 2018-19 Budget, the Government has released exposure draft legislation to tighten the thin cap rules by: 

  • requiring entities that are required by law to prepare financial statements in accordance with accounting standards to value their assets and liabilities for thin cap purposes in the same way as they do in their financial statements;
  • removing the ability of entities to revalue their assets and liabilities and recognise certain intangible assets specifically for thin cap purposes; and
  • ensuring that non-ADI foreign controlled Australian tax consolidated groups and MEC groups that control a foreign entity or have an overseas permanent establishment are treated as both outward and inward investing entities for thin cap purposes.

The first two changes will apply after 8 May 2018, subject to a transitional rule for asset and liability values determined before that date. The third change applies to income years beginning on or after 1 July 2019.
Thin cap draft tax determinations released

The ATO has released two draft tax determinations to help non-ADI entities work out their "adjusted average debt" for thin cap purposes.

Draft Taxation Determination TD 2018/D4 sets out how entities must value their "debt capital" for thin cap purposes. The concept of debt capital is used, among other things, to work out entities' adjusted average debt.

Draft Taxation Determination TD 2018/D5 considers the type of costs that are "debt deductions". In calculating their adjusted average debt, entities must, among other things, include all of their debt capital that gives rise to debt deductions. 
Stapled structures – integrity rules for transitional arrangements and infrastructure concession

The Government has released exposure draft legislation setting out the "integrity rules" that will apply to the approved economic infrastructure facility exception and the transitional arrangements under previously announced changes to the tax treatment of stapled structures.

The integrity rules include:

  • extending the scope of the existing non-arm's length income rules for Managed Investment Trusts (MITs) to stapled entities eligible for the infrastructure exception or transitional arrangements where they are not a party to the scheme that gives rise to the non-arm's length income; and
  • the introduction of statutory caps on the amount of cross-staple rent that is eligible for the 15% withholding tax rate available under the MIT regime for projects eligible for the infrastructure exception or during the transitional period.
Updated draft Practical Compliance Guideline

 The ATO has released draft Schedule 2 to Practical Compliance Guideline (PCG) 2017/4DC. This PCG discusses the ATO's compliance approach to tax issues associated with cross-border, related-party financing arrangements and related transactions.

The new Schedule 2 sets out specific risk indicators for related party derivative arrangements that are used to hedge or manage the economic exposure of a company or group of companies.
Legislation passed by Parliament in August 

 The following legislation passed Parliament in August and has received or is awaiting Royal Assent:

  • Treasury Laws Amendment (Enterprise Tax Plan Base Rate Entities) Bill 2018– This Bill requires that a company (with aggregated turnover under $50m) has no more than 80% passive income in order to qualify for the 27.5% tax rate;
  • Treasury Laws Amendment (OECD Multilateral Instrument) Bill 2018 – This Bill gives the force of law to the OECD Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting; and
  • Treasury Laws Amendment (Tax Integrity and Other Measures No. 2) Bill 2018– Among other things, this Bill introduces into law the new hybrid mismatch rules.
  •  

Revised guidance note issued by FIRB  in relation to tax conditions for foreign investment approvals

 

What you need to know

 

In February 2016, the Government announced it would introduce new tax conditions for foreign investment approvals in order to ensure tax compliance by foreign investors.

 

In November 2016, the Foreign Investment Review Board (FIRB) first published guidance on the new tax conditions.

 

FIRB has recently issued a revised guidance note, which provides guidance on the ATO's assessment of tax risk and the imposition of standard tax conditions.

 

What does the guidance note cover?

 

FIRB Guidance Note 47 provides guidance on the new tax conditions for foreign investment approvals and when they may be imposed.

 

In broad terms, the "standard" tax conditions in Part A require an investor seeking FIRB approval and entities in its "control group" to:

 

  • comply with Australian tax laws (but this condition is not breached if the relevant parties have taken reasonable care to comply and have a reasonably arguable position);
  • provide any documents or information to the ATO in a timely manner, including documents or information held outside Australia;
  • pay any outstanding tax debts; and
  • provide an annual report to FIRB on their compliance with the above conditions.

 

In cases of significant risk, additional tax conditions may be imposed. Any additional tax conditions would be tailored to the particular circumstances, two "possible" additional conditions include requiring the investor to:

 

  • engage in good faith with the ATO to resolve disputes; and 
  • provide information to the ATO on a periodic basis, including forecasts of tax payable.

 

The guidance note includes a reporting template that investors may use to comply with the annual reporting obligation.

 

What are the changes?

 

Whereas the original guidance note said that the ATO is consulted on every non-residential foreign investment proposal, the revised guidance note merely states that the ATO is consulted.

 

Nonetheless, we do not believe this represents a change in practice.

 

The revised guidance note clarifies the ATO's approach to assessing tax risks and defines low, medium and high tax risks as follows:

 

  • Low: the ATO has not identified significant tax issues;
  • Medium: there may be a risk to tax revenue or to the integrity of the tax system; and
  •  High: there is a clear risk to tax revenue or to the integrity of the tax system.

 

The guidance note explains that this risk rating reflects a broad range of matters, including the tax compliance history of the investor and its related parties, the "transparency" of their engagement with the ATO, the choices and behaviours evidenced by their tax affairs as well as the tax impact of earlier transactions.

 

The new guidance note provides a link to a checklist of tax information the ATO requires to make its assessment, which includes the nature and tax residence of the entities in the structure and the debt and equity instruments used to finance the acquisition. If the investor is unable to provide all of the requested information, the tax risk may still be assessed as low. However, the additional tax conditions are likely to be imposed and the investor may be required to provide an undertaking. An example undertaking is provided in Attachment A and includes undertakings that:

 

  • the investment will not have features of concern to the ATO or be within high risk parameters identified by the ATO in its public guidance material (eg, taxpayer alerts); and
  • the applicant will provide the requested information to the ATO within 90 days as well as evidence that the arrangements were implemented in a manner consistent with the undertaking.

 

Comments

 

As with the original guidance note, the new guidance note states that the imposition of the standard tax conditions (and additional tax conditions) will be done on a case by case basis. Matters that will be taken into account include the complexity of the investment proposal, its size and previous interactions of the foreign investor and Australia's tax system.

 

The new guidance is that the standard tax conditions may be imposed even if the tax risk is assessed as low. In our experience, the standard tax conditions are imposed in many (but not all) cases.

 

Based on our recent experiences with the FIRB application process, the ATO is becoming more intensely involved and the ATO is requesting more information than in the past, particularly in relation to related party financing arrangements. Where that information cannot be immediately provided, FIRB has sought undertakings from the applicant to provide the detailed information within a specified timeframe. 

 

These developments suggest that FIRB approval may take longer than it previously did and require more information to be provided than before. Where possible, foreign investors should consider engaging with FIRB earlier in the investment process.

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For further information, please contact:

 

Vivian Chang, Partner, Ashurst

vivian.chang@ashurst.com

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