On 24 November 2016, the Foreign Investment Review Board (FIRB) released its Guidance Note No 47 on tax conditions for foreign investment approvals. It includes a template for reporting back to FIRB on compliance with tax conditions.

[FIRB website] [LTN 230, 28/11/16]

This Guidance Note outlines circumstances in which the Treasurer will consider tax‑related conditions and serves as advice to potential foreign investors of the tax conditions that in certain circumstances may be applied to a no objection notification.

The Treasurer does and will continue to consider the potential impact of an action on Australian tax revenues in determining whether the action is contrary to the national interest.

If, following consultation, the Treasurer considers the action may involve a risk to tax revenues, then the conditions shown at Part A of Attachment A may be imposed as conditions of a no objection notification.

Situations where tax conditions may be imposed to ensure an action is not contrary to the national interest would be to address risks associated with, but not limited to, the following:

  • Capital gains tax
  • Dividend withholding tax
  • Transfer pricing
  • Low tax jurisdictions
  • Consolidations
  • Non-resident withholding tax
  • Debt and equity risks
  • Thin capitalisation
  • Tax avoidance
  • Tax liabilities on future disposals

If an action is considered to have a significant or particular tax risk then one or both of the additional tax conditions shown at Part B of Attachment A may also be imposed. These would be tailored to the particular circumstances of the action under consideration.

If legal proceedings are commenced and a court finds that a condition has in fact been breached then it is a matter for the courts to apply penalties. For serious breaches where it is contrary to the national interest to allow the investment to continue, then the Treasurer may consider an order requiring disposal of the interest.

[FIRB – Guidance Note No. 47]

Taxation conditions that may apply to foreign takeovers etc.

Attachment A

  1. ‘Some tax risk’ Conditions that may apply.
  2. 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.
  3. 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.
  4. 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.
  5. 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 that is required to be provided to 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.
  6. 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.
  7. 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.
  8. The applicant must advise the Foreign Investment Review Board within 60 days of taking the action [eg. the takeover] that it has done so.
  9. The applicant must advise the Foreign Investment Review Board within 60 days of a termination event that the event has taken place.

1 For the purposes of these conditions a termination event occurs:

    • when the applicant ceases to hold the interest the acquisition of which was the subject of the no objection notification;
    • 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;
    • 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:

  • that control the applicant (a controller);
  • that a controller controls;
  • 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.

Particular tax risk – possible additional conditions

  1. 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
  2. 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 requesting 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.

Category: Tax Month - November 2016

Author: John Morgan

John Morgan is a tax specialist lawyer of more than three decades experience now practicing at the Victorian Bar - w: www.FJMtax.com e: f.john.morgan@vicbar.com.au