10 March 2016

Significant tax changes on approvals for foreign investment into Australia

This article was written by Katrina Parkyn, Jerome Tse and Scott Heezen.

Foreign investors into Australia should be aware of two critical changes to Australia’s foreign investment regime. These changes potentially affect future acquisitions and sales of Australian investments and need to be carefully considered.

The first measure involves the introduction of a new non-final withholding tax regime which applies to purchasers of certain types of Australian assets. The new regime, which commences from 1 July 2016, will have an impact on both vendors and purchasers of affected assets. However, there are a number of ways to ease the practical compliance burden, including through the use of vendor declarations, clearance certificates and exemptions.

The second measure, which was announced by the Treasurer on 22 February 2016, introduces tough compliance and tax transparency conditions as part of any Foreign Investment Review Board (FIRB) approval. Although the announcement contains some “business as usual” conditions, a detailed analysis reveals that they extend the scope of Australia’s taxation laws. The new conditions should be carefully considered well before approaching FIRB, especially as the new conditions may result in delays in some cases.

We have already been assisting a number of clients understand the new measures in the course of live FIRB applications and are in discussions with various stakeholders to work out practical ways to minimise the burden on foreign investors.


New 10% non-final foreign resident withholding tax

What type of transactions are affected?

Transactions that involve the sale or acquisition of:

  • shares in a company or units in a trust that, directly or indirectly, holds Australian assets
  • real property in Australia (including leasehold)
  • mining rights over Australian land.

For transactions caught by the new rules, the purchaser will be required to pay 10% of the purchase price to the Australian Tax Office (ATO) at or before settlement.

When do the changes take effect?

The changes apply to acquisitions which occur on or after 1 July 2016.

Acquisitions made under a contract entered into before 1 July 2016 (but not completed until on or after 1 July) should not generally be caught, but this is an area where particular care will need to be taken to ensure that the relevant “acquisition” (for tax purposes) occurs before 1 July 2016.

Acquisitions made under a contract entered into on or after 1 July 2016 will be subject to the new rules.

What should clients contemplating the sale or acquisition of shares or units do?

The 10% withholding tax will not apply in certain situations, including where:

  • a vendor provides a qualifying declaration that it is an Australian tax resident;
  • a vendor provides a qualifying declaration that the shares or units are not “indirect Australian real property interests”;
  • the transaction is on an approved stock exchange; or
  • a variation is sought from the ATO to reduce the withholding tax rate.

Vendors may also seek a gross-up.

What should clients contemplating transactions involving Australian real property or mining interest do?

The 10% withholding tax will not apply in certain situations, including where:

  • the ATO issues a certificate that the vendor is not a foreign resident;
  • the transaction’s value is under the de-minimis threshold of AUD 2 million; or
  • a variation is sought from the ATO to reduce the withholding tax rate.

More information

Given the commencement date of 1 July 2016, the new 10% withholding regime is potentially relevant to transactions that are currently being negotiated. We are already assisting a number of clients on how to respond to the changes in the context of live transactions. 

For more information on the new rules, please see our previous article New withholding tax on transactions involving taxable Australian property - concerns remain for taxpayers, or contact Katrina Parkyn, Tim Sherman or your usual KWM Tax contact.


Katrina Parkyn
Partner, Brisbane
Email

Tim Sherman
Partner, Sydney
Email

Tax conditions attach to FIRB approvals

The Treasurer announced that the Government will use the foreign investment system to ensure tax compliance and tax transparency by multinational companies when investing in Australia (see our earlier alert here). The potentially onerous conditions extend the scope of Australia’s taxation laws and must be carefully considered as part of any FIRB application process. In particular, they impose significant obligations in relation to the provision of information to the ATO and can require businesses to ensure that their associates comply with certain tax related conditions.

What are the conditions?

The standard and optional conditions are as follows:

  1. The applicant must comply with Australia’s taxation laws in relation to the action, and any transactions, operations or assets in connection with the assets or operations acquired, directly or indirectly, as a result of the action.
  2. The applicant must use their best endeavours to ensure, and within their powers must ensure, that its associates comply with Australia’s taxation laws in relation to the action and any transactions, operations or assets in connection with the assets or operations acquired, directly or indirectly, as a result of the action.
  3. The applicant must provide any documents or information requested by the ATO in connection with the application or potential application of Australia’s taxation laws in relation to the action and any transactions, operations or assets in connection with assets or operations acquired, directly or indirectly, as a result of the action. These documents or information must be provided within the timeframe specified by the ATO.
  4. The applicant must use their best endeavours to ensure, and within their powers must ensure, that its associates provide any documents or informationˆ requested by the ATO in connection with the application or potential application of Australia’s taxation laws in relation to the action and any transactions, operations or assets in connection with assets or operations acquired, directly or indirectly, as a result of the action. These documents or information must be provided within the timeframe specified by the ATO.
  5. The applicant must notify the ATO if it enters or has entered into any material (as defined by the ATO) transaction(s) or other dealing(s) in connection with the action and any material transactions, operations or assets in connection with assets or operations acquired, directly or indirectly, as a result of the action, to which the transfer pricing rules in Division 815-B of the Income Tax Assessment Act 1997 or the anti-avoidance rules in Part IVA of the Income Tax Assessment Act 1936 may potentially apply, where such transactions or dealings have not been previously notified to the Commissioner.
  6. The applicant must use its best endeavours to ensure, and within its powers must ensure, that its associates must notify the ATO if they enter or have entered into any material (as defined by the ATO) transaction(s) or other dealing(s) in connection with the action and any material transactions, operations or assets in connection with assets or operations acquired, directly or indirectly, as a result of the action, to which the transfer pricing rules in Division 815-B of the Income Tax Assessment Act 1997 or the anti-avoidance rules in Part IVA of the Income Tax Assessment Act 1936 may potentially apply, where such transactions, dealings, operations or assets have not been previously notified to the Commissioner.
  7. The applicant must pay any outstanding taxation debt, and must use their best endeavours to ensure, and within their powers must ensure, that its associates pay any outstanding taxation debt, which is due and payable at the time of the proposed action.
  8. The applicant must provide an annual report to the Foreign Investment Review Board on compliance with these conditions. The first report must cover the first 12 month period commencing on the date of this notice. All subsequent reports must cover a 12 month period beginning on each anniversary of the date of this notice. Each report must be provided within 30 days after the end of the 12 month period to which it relates.
  9. The applicant must engage in good faith with the ATO to resolve any tax issues in relation to this transaction and its holding of the investment.
  10. The applicant must provide information as specified by the ATO on a periodic basis including at a minimum a forecast of tax payable.

What should potential foreign investors do?

We have already been assisting a number of clients understand and apply the new measures in the course of live FIRB applications. We appreciate that internal communication of these new conditions is critical to the success of a transaction and can help navigate the process with you. We are also in discussions with various stakeholders to work out practical ways to minimise the burden on foreign investors.

More information 

For more information on the FIRB process and the interactions with Australian tax laws, please contact Scott Heezen or Malcolm Brennan, or your usual KWM Tax or FIRB contact.


Scott Heezen
Partner, Sydney
Email

Malcolm Brennan
Partner, Canberra
Email
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