Australia: ATO focus on cross-border financing arrangements
Australia: Cross-border financing arrangements
Traditional sources of debt capital are becoming more difficult to source, and one consequence has been an increase in lending activity from debt funds and institutional investors.
Historically the focus of the Australian Taxation Office (ATO) has been on related-party debt, transfer pricing, and thin capitalisation of cross-border financing arrangements. While continuing its focus in these areas, the ATO recently has focused its attention on alternative debt financing and how those arrangements are structured.
Specifically, the ATO published two taxpayer alerts in 2020 outlining its concerns in relation to cross-border financing arrangements.
- The first taxpayer alert (TA) 2020/2 relates to cross-border arrangements that involve foreign investors investing directly into Australia through debt that is “non-vanilla.” While the ATO has not targeted any one industry, arrangements more likely to attract ATO scrutiny include situations when a lender has participation or control rights that extend beyond those of ordinary debt holders, or arrangements when the lender has exposure to equity-like returns. The ATO stated that it will review the tax characterisation of such arrangements to determine that they are being appropriately treated under a number of different provisions in the tax legislation—including transfer pricing, the general anti-avoidance provisions, the debt-equity rules, and withholding tax provisions.
- In TA 2020/3, the ATO noted its concerns with arrangements that involve interposed offshore entities that facilitate the avoidance of interest withholding tax—such as when companies obtain financing offshore and incur debt deductions against Australian assessable income (usually trust distributions) without incurring a liability to Australian interest withholding tax. Arrangements attracting the ATO’s attention include those with features that reduce the effective tax rate on Australian-sourced income to a minimal or nil amount, when related-party debt is priced at a significant premium to comparable third-party debt, or when the arrangement falls outside the “green zone” (as referred to by the ATO’s transfer pricing guidance). In TA 2020/3, the ATO signaled that the outcomes of these structures may be subject to challenge under the debt-equity, thin capitalisation, transfer pricing or general anti-avoidance provisions. Features that will attract ATO attention include when entities are residents in lower tax jurisdictions, non-application of thin capitalisation measures, financing at a significant premium to relevant third-party debt, gearing levels substantially above that of the group or debt that is economically more akin to equity. However, to the extent the capital structure of the taxpayer is within ordinary and commercially observed levels, and the applicable thin capitalisation limits and transfer pricing requirements are met, the risk of an ATO challenge may be reduced.
As debt markets and products continue to evolve, the tax treatment of new products and instruments will need to be continually assessed. The ATO has already flagged its concerns in relation to structured arrangements in the two taxpayer alerts, and the ATO will continue to monitor the features of future arrangements through compliance activities. In addition, taxpayers need to be aware of the ATO’s ongoing focus on transfer pricing with regard to related-party transactions and the Australian anti-hybrid laws, among other items.
For more information, contact a KPMG tax professional in Australia:
Scott Farrell | +61 2 9335 7366 | email@example.com
Tony Mulveney | +61 2 9335 7121 | firstname.lastname@example.org
Grant Mackinlay | +61 2 9346 5727 | email@example.com
Michelle Bennett | +61 3 9288 5910 | firstname.lastname@example.org
© 2022 KPMG LLP, a Delaware limited liability partnership and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.
For more detail about the structure of the KPMG global organization please visit https://home.kpmg/governance.
The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organization. KPMG International Limited is a private English company limited by guarantee and does not provide services to clients. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm. The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.