The Treasurer has recently emphasised that the Government has the right to force a divestment of an asset if a foreign purchaser fails to comply with their obligations under the recently introduced FIRB tax conditions.
The Treasurer said on 8 August:
Every single foreign investment application that is approved by me as Treasurer requires a tax deed to be signed by the purchaser which protects against, for example, shifting profits offshore so they pay less tax and if they are found to be in breach of that then I can force a divestment of the asset.
The conditions were originally introduced in February 2016, with an accompanying set of draft guidelines issued shortly after. Following submissions from numerous interested parties including MinterEllison, the conditions were substantially amended on Budget night in May to make compliance simpler. A new set of draft guidelines has also been issued, which have yet to be finalised. However, the intent of the conditions remains, as recently reinforced by the Treasurer, meaning that even after FIRB clearance has been granted, foreign purchasers will be subject to careful scrutiny of their tax positions, with the potential for divestment in addition to the usual tax penalties.
The key requirements of the conditions are, in summary:
- The applicant must comply with Australia's tax laws in relation to the 'action' (i.e. an acquisition or commencement of an Australian business or asset), as well as in relation to transactions, operations and assets in connection with the assets or operations acquired. The revised conditions provide that this condition is not breached if the applicant takes reasonable care and has a reasonably arguable position.
- The applicant must provide information to the ATO upon request, seemingly even where that information could not be compulsory obtained by the ATO absent the condition.
- The applicant must pay any outstanding tax debts at the time of the action, except where otherwise agreed with the ATO.
- The applicant must also use its best endeavours to ensure, and within its powers must ensure, that its 'control group' complies with the above conditions. 'Control group' generally speaking refers to parent, sibling and child companies – this has been appreciably narrowed from the original version of the conditions, which applied to 'associates', which has a much broader meaning than 'control group'. The conditions and proposed guidance are yet to clarify what specifically is required of applicants in these circumstances. Nevertheless this condition remains potentially onerous particularly in the case of entities the applicant does not control such as upstream parent entities and sibling entities.
- The applicant must provide annual reports to FIRB on its compliance with the conditions.
There are also further additional conditions which may be applied in particular circumstances which include an obligation to engage with the ATO, and an obligation to provide forecasts of tax payable.
The conditions are significant both because satisfaction of the conditions may delay, or potentially prevent, receipt of FIRB clearance, and because compliance with the conditions is an ongoing obligation with a significant additional consequence for non-compliance, namely potential forced divestment of the Australian assets. It seems from the Treasurer's comments that an applicant may be the subject of a forced divestment order in addition to any tax penalties it may be subject to. Notwithstanding the exceptions for reasonable care and reasonably arguable positions, this may place foreign owners in a difficult position if their view of the Australian tax laws differs from that of the ATO, as the consequences of losing a dispute with the ATO may now be much greater for a foreign investor than for an Australian owner of the same assets.
These risks can be managed by early engagement with the ATO, which may involve obtaining private rulings, or entering into Advance Pricing Arrangements, in order to obtain certainty of treatment. MinterEllison can assist with all aspects of obtaining FIRB clearance and engagement with the ATO, including identification of risk areas and preparation of the case to be put to both FIRB and the ATO.