WHO SHOULD READ THIS

  • Foreign investors (both private and public) who plan to invest in Australia.

THINGS YOU NEED TO KNOW

  • The Turnbull Government has introduced new conditions to be imposed on foreign investment approvals to ensure that foreign investors comply with Australia’s tax laws.  A breach of these new conditions could result in severe penalties including forced sale of assets.

WHAT YOU NEED TO DO

  • Assess your tax compliance history and current tax arrangements, before an application for FIRB approval is made, to determine the potential impact of these new conditions.  Specialist tax and FIRB advice should be sought.

On 22 February 2016, Treasurer Scott Morrison announced that the Turnbull Government will start to impose new conditions on foreign investment approvals to ensure that multinational companies investing in Australia are complying with Australian tax laws by paying the required amount of tax on their Australian earnings.

A foreign investor who proposes to acquire shares in Australian companies, assets of Australian business or land in Australia will (subject to certain monetary thresholds and exemptions) first need to obtain approval from the Treasurer via the Foreign Investment Review Board (FIRB).  In granting that approval, the Treasurer may impose conditions to ensure the investment is not contrary to the national interest.  The government has long had the power to impose these conditions and there are some standard conditions that are currently imposed on all approvals for certain types of investment (for example, development conditions on the acquisition of vacant land).  In certain circumstances, the government has also imposed very specific and sometimes quite onerous conditions on particular proposed transactions where they relate to sensitive assets, or large transactions that impact on the national interest.

In this context, the announcement by Scott Morrison does not represent a change in the law, but rather reflects an increased focus on tax, and in particular the payment of Australian tax by foreign investors, as a vital aspect of the ‘national interest’ test.  

Summary of new conditions 
A summary of the proposed new tax related conditions that are likely to be applied to FIRB approvals, are as follows:

  • the applicant and its associates must comply with Australia’s taxation laws
  • the applicant and its associates must provide any documents or information requested by the Australian Tax Office (ATO) in connection with the application within the timeframe specified by the ATO
  • the applicant and its associates must notify the ATO if it enters or has entered into any material transactions or other dealings to which the transfer pricing rules in theIncome Tax Assessment Act 1997 (Cth) or anti-avoidance rules in the Income Tax Assessment Act 1936 (Cth) may apply 
  • the applicant and its associates must pay any outstanding taxation debt which is due and payable at the time of the proposed action, and
  • the applicant must provide an annual report to FIRB detailing their compliance with these conditions.

Further conditions were also announced which may be applied in circumstances where a significant tax risk is identified.  Such additional conditions include the requirement that the applicant:

  • engage in good faith with the ATO to resolve any tax issues
  • enter into advance pricing arrangements with or seek rulings from the ATO in certain circumstances, and
  • provide information to the ATO on a periodic basis (for example - a forecast of tax payable). 

Consequences for failing to comply with conditions
A failure by a foreign investor to comply with any conditions imposed on their FIRB approval is a breach of the Foreign Acquisitions and Takeovers Act 1975 (Cth) and may result in a number of severe penalties, including prosecution, fines and potentially an order for the forced sale of that investor’s Australian assets. 

Conclusion
These proposed new conditions do not increase the tax payable by foreign investors, but will rather impose new administrative obligations on foreign investors designed to ensure their compliance with the existing tax rules.  The additional reporting requirements, and the requirement that rulings be obtained before undertaking certain arrangements are designed to increase the transparency of the tax affairs of foreign investors and the inclusion of the additional tax conditions a FIRB approval gives the government access to additional penalties for breaches.

Foreign investors should ensure that they obtain appropriate tax advice when seeking to invest into Australia to ensure that they do not inadvertently breach the conditions that are likely to be contained in their FIRB approval.