In the flurry of government announcements on budget night it was easy to miss the release of the revised FIRB tax conditions.
It would appear that much of the feedback given during the consultation process has been taken into account, with the revised conditions being, in the most part, targeted and concise.
Whilst there are still aspects of the revised conditions which will need some further clarification (which will hopefully be provided in a proposed guidance note), a number of the key concerns of the original conditions have been addressed.
How have the conditions changed?
Whilst there are still 8 “standard conditions” there are significant changes to the substance of these:
- The first condition which requires an applicant to comply with Australia’s tax laws has been clarified to confirm that it relates to Commonwealth laws only (not State) and it is not breached where the applicant has taken reasonable care and has a reasonably arguable position in relation to its tax position, moving it away somewhat from a strict liability condition.
- The second condition which required an applicant to use best endeavours to ensure (and within its powers must ensure) that its associates comply with the tax laws has been amended to apply only to entities in an applicant’s “control group”. This is an important change as the concept of control group is narrower than the tax act concept of associate previously used. In particular this should address some concerns regarding the breadth of the condition in the context of investors in certain Australian funds and consortium arrangements. However, control group is defined broadly enough to cover upstream controllers of the applicant as well as downstream controlled entities. Control for these purposes takes its meaning from the Corporations Act being the capacity to determine the outcome of decisions about a second entity’s financial and operating policies. In determining whether an entity has this capacity it is necessary to consider both the practical influence the entity can exert as well as any practice or pattern of behaviour.
- The third condition has also been narrowed. Previously it required an applicant to provide any information or documentation requested by the ATO in connection with the application or potential application of Australia’s tax laws, in relation to both the transaction subject to FIRB approval and connected transactions, operations and assets. The condition now, in effect, mirrors the applicant’s existing obligations to provide documents or information in accordance with the Commonwealth taxation laws, but makes a failure to do so subject to the FIRB regime.
- The fourth condition previously required an applicant to use best endeavours to ensure (and within its powers must ensure) that associates provide information or documentation requested by the ATO in connection with the application or potential application of Australia’s tax laws, in relation to the transaction subject to FIRB approval. Like the second condition it has been narrowed to apply to entities in the applicant’s control group (not its associates) and only where such information has been requested by the ATO in accordance with the Commonwealth taxation laws.
- Importantly, the original conditions that required an applicant to notify the ATO where, in connection with the transaction subject to FIRB approval, it entered into a material transaction to which the transfer pricing or anti avoidance provisions may “potentially” apply has been removed. Similarly the obligation on an applicant to ensure that its associates make similar notifications has also been removed. The application of this condition was a key concern raised during the consultation process.
- The condition to pay outstanding taxation debt has also been modified. The condition now only applies to an applicant as well as entities in its control group. It has also been clarified that the condition does not apply to payment arrangements agreed with the ATO or where the ATO has otherwise exercised its discretion to defer payments of disputed amounts.
- The requirement to provide an annual report to FIRB remains. The terms of the condition have, however, been clarified in respect to the timing of such reporting.
- Conditions seven and eight are new. Condition seven requires that an applicant merely notify FIRB that is has taken the relevant action (being, in effect, the arrangement the subject of FIRB approval) within 60 days of doing so. Condition eight requires an applicant to advise FIRB within 60 days of any termination event. For these purpose, a termination event occurs where:
- an applicant ceases to hold the interest the subject of the FIRB approval
- an applicant ceases to control (within the meaning of the Foreign Acquisitions and Takeovers Act 1975) the entity or business the subject of the approval c. the applicant ceases to carry on an Australian business the starting of which was subject to the FIRB approval.
- The two additional conditions which are to apply only where a tax risk is identified are unchanged. Interestingly, the heading to these conditions has been changed from referring to “significant tax risk” to a “particular tax risk”. Also, the information which may be required to be reported now specifically refers to transfer pricing and the anti-avoidance rules in Part IVA whereas previously it referred to thin capitalisation.
We understand that FIRB will also be releasing a guidance note on the tax conditions in the near future. Whilst the revised conditions have addressed a number of concerns raised during the consultation process, there are still a number of aspects for which guidance will be important, including:
- clarification of the phrases “best endeavours” and “within its powers must ensure”. In particular, what types of actions does FIRB expect an applicant to take in relation to its control group? Control group is defined to include controllers of the applicant - what types of actions are envisaged to be required to deal with such persons e.g. withholding of dividends etc? In practice, it is likely to be difficult for applicants to ensure that all entities in its control group comply with the relevant requirements
- there are still no materiality thresholds
- the annual reporting requirement still does not have a sunset date
- setting out what the consequences of a breach of condition would be (e.g. where a breach may have been remedied or is not considered to be material).”