Australian roundup: AusNet decision, South African treaty modifications, and thin capitalisation reforms

This article was originally published on the ITR website and is reproduced with permission from the publisher.

In this update, we analyse a Federal Court ruling on rollover relief, the publication of updates to a double tax agreement, and a report on amendments to the thin capitalisation reform bill.

 

AusNet Services

On February 16 2024, the Federal Court of Australia handed down its decision in relation to AusNet Services Ltd v Federal Commissioner of Taxation, (2024) FCA 90, dealing with the application of Division 615 rollover relief to a scheme restructuring a stapled group. The restructure very broadly involved the unstapling of three entities and the interposition of a newly formed company between the security holders and the stapled entities over a series of steps that were taken to have occurred sequentially. The stapled entities had previously been managed as if they were a single entity.

Rollovers (such as the Division 615 rollover) are very commonly used in Australia for restructures of multinational groups, and this was the first case looking at the application of this rollover to a stapled group. Where a restructure is applied, the underlying cost bases of the assets of the rolled-over entity are generally inherited by the acquirer rather than being “stepped up” (which is what would generally happen).

In the present case, the taxpayer was arguing that the rollover was ineffective and therefore the cost bases of the underlying assets should have been stepped up (giving rise to additional capital allowance deductions).

The Australian Taxation Office (ATO) was successful in arguing that the Division 615 rollover applied to the restructure. The Federal Court rejected the taxpayer’s principal argument that a Division 615 rollover is only available where a shelf company is interposed between an entity and its existing shareholders, which appears to be the published view of the commissioner in Taxation Ruling TR 97/18. The Federal Court stated that the legislators had not contemplated stapled arrangements when drafting these provisions and cautioned against the use of extrinsic materials when the statutory language is clear.

This judgment provides useful commentary as to the interpretation of Division 615, particularly in the context of restructures involving stapled structures. It will be interesting to see whether the commissioner issues any guidance or updates Taxation Ruling TR 97/18 following on from this decision.

 

Australia and South Africa double tax agreement synthesised text

The ATO has recently published the synthesised text for the Australia and South Africa double tax agreement (DTA), which incorporates the modifications made to the DTA by the OECD Multilateral Instrument (MLI).

These modifications are effective from 1 January 2023 (for withholding taxes on income) and for income years starting on or after 1 July 2023 (for all other taxes), and include:

• Replacement of the “place of effective management” tie-breaker test for dual-resident entities with the requirement to apply to the competent authorities of each country for a determination;
• An extension of the benefits of DTAs to transparent entities;
• Amendments to the definition of a permanent establishment (PE) to prevent the artificial avoidance of PE status; and
• The adoption of the “principal purpose test”, which denies treaty benefits in the event of treaty abuse.

The ATO has stated that it is preparing synthesised texts for the majority of Australia’s double tax agreements that are affected by the MLI and have already published synthesised texts for 24 of Australia’s double tax agreements.

 

Thin capitalisation reforms

Following the 2022 - 23 Budget, the Australian government introduced into the Australian Parliament legislation reforming Australia’s thin capitalisation rules to align them with the OECD best practice approach in OECD BEPS Action 4 essentially (moving from an assets-based test to an earnings-based test).

On 28 November 2023, the Australian government released substantial amendments to the prior draft of the thin capitalisation reforms that were referred to the Senate Economics Legislation Committee. These amendments were intended to deal with some of the issues that were raised during consultation, including with respect to the third-party debt test, the debt deduction creation rules, and the meaning of “obligor group” and “tax EBITDA”.

On 5 February 2024, the Senate Economics Legislation Committee published its report on the amendments to the bill. The majority of the committee supported the amendments and recommended that the bill be passed as amended. Although the majority recognised that there were still potential issues with the reforms, the majority were of the view that these could generally be dealt with through ATO guidance and did not need to further delay the bill.

The minority of the committee issued a dissenting report in which they recommended a number of technical amendments to the bill, including a delay to the start date of the reforms. The minority were very broadly of the view that technical amendments should be made to the bill to deal with the issues raised during consultation, and it was not appropriate to deal with these issues through ATO guidance.

The updated bill is yet to be tabled with Parliament. Given the composition of the Senate committee, the findings of the committee are perhaps unsurprising. It will be interesting to see whether these amendments will have the broader support of Parliament, and what technical amendments (if any) will be required to pass the bill.