With 2017 being a big year for tax developments (though unfortunately few good news stories) and 2018 shaping up to be a strong year for M&A activity, we set out below our review of recent learnings and a summary of what we expect to be the key M&A tax issues in 2018.


It has been five years since former Commissioner of Taxation Michael D’Ascenzo AO was appointed to the Foreign Investment Review Board (his replacement with tax lawyer Teresa Dyson was announced in December 2017), so it is perhaps not surprising that tax considerations have never played a more important role in the FIRB process. FIRB applicants should expect ATO engagement and questioning as a standard part of the FIRB process, with tax conditions being imposed on most FIRB approvals for larger transactions, although they are not mandatory.

ATO involvement in FIRB applications now occurs in most transactions – from large infrastructure privatisations to private equity acquisitions and public market corporate M&A – making it critical to ensure that tax issues are considered before lodging a FIRB application. Of particular importance will be funding structures, including risk-ratings determined in accordance with ATO guidance (see below) – often a target of ATO enquiries.

Vendors and purchasers should also consider the relevance of the non-resident CGT withholding rules (which can also apply to resident vendors), including the potential need for declarations and clearance certificates and ensuring that sale documents adequately address the issue. This sometimes overlooked issue can become front of mind when ATO reminder notices about withholding obligations are issued after contracts are signed!


2017 saw the issue of the ATO’s related party debt guidance (PCG 2017/4) in draft and final form. The key feature of the PCG is a self-assessment of a colour-coded "risk zone" from green (low risk) to red (high risk), which will be used by the ATO to determine "the allocation of compliance resources". Although self-assessment under the PCG is stated to be optional, some taxpayers have been required to self-assess and report to the ATO as a condition of FIRB approval.

The guidance is expressly not a technical interpretation of the law (or a public ruling or "safe harbour"), such that a low risk rating does not necessarily mean compliance with the law and a high risk rating does not necessarily mean non-compliance. However, it states that high risk rated taxpayers can expect ATO review or audit as a matter of priority, the use of formal information gathering powers and an increased prospect of litigation. Of particular concern is that a high risk rating will automatically result if any one of the following factors are present:

  • interest rate more than 200bps over cost of "referable debt";
  • lender in a 0% tax rate jurisdiction; or
  • involves a hybrid arrangement (instrument or entity).


Draft anti-hybrid legislation was released in November 2017 as the next step in Australia’s response to the OECD Base Erosion and Profit Shifting project measures. The draft includes both general and specific rules targeting double deduction and deduction/non-inclusion outcomes, through either misalignment of entity recognition (hybrid entities) or mismatched characterisation of instruments (hybrid instruments).

The legislation is particularly complex and will have a broad range of operation. Common structures which could be subject to the provisions include:

  • cross-border instruments treated as debt in Australia and equity in a foreign jurisdiction (such as a redeemable preference share which is a debt interest for Australian purposes); and
  • entities which are tax-transparent in a foreign jurisdiction but a taxable entity in Australia (such as US LLCs or Australian entities subject to US "check-the-box" elections).

The legislation could take effect as early as October 2018 and will not include grandfathering provisions and so needs to be considered in acquisition structuring (and in reviewing existing structures).


In mid-December it was looking like Australian M&A deal volume in 2017 would be on par with 2016 with deal value down. However, the announcement of a number of mega deals in late December resulted in 2017 deal volume and value being higher than in 2016. Despite the relatively slow start to the year and the challenge of a somewhat unstable global political climate, 2017 saw the announcement or completion of a number of mega deals both in Australia and globally, many of which we advised on:

  • Rio Tinto’s $3.2 billion divestment of Hunter Valley coal assets;
  • the $11 billion merger of Tabcorp and Tatts Group;
  • Unibail-Rodamco’s $33 billion offer for Westfield; and
  • The Walt Disney Company’s announced intention to acquire $68 billion of assets from 21st Century Fox.