Our audit team undertakes the complete range of audits required of Australian accounting laws to help you to help you meet obligations or fulfil best practice procedures.
It is a challenging time for many; from a cost-of-living crisis and global political uncertainty, to lingering stress post pandemic. Coupled with business control weaknesses or vulnerabilities, these pressures can create the perfect storm for financial crime to occur.
We help clients understand and address their employment tax obligations to ensure compliance and optimal tax positioning for their business and employees.
The ATO has tightened exemption criteria for country-by-country reporting, effective January 1, 2024. Taxpayers will need to submit more information, aligning with the ATO's focus on international tax risks and local file reporting.
We provide independent oversight and review of your organisation's control environments to manage key risks, inform good decision-making and improve performance.
We enable our clients to achieve their strategic objectives, fulfil their purpose and live their values supported by effective and appropriate risk management.
In the latest episode of Beyond the Numbers with Grant Thornton, our Brisbane Office Chair and Tax Partner Sian Sinclair and Risk Consulting Partner Jarrod Lean discuss opportunities, challenges, procurement risks and strategies.
Our forensics team identifies and obtains relevant information, investigates the financial issue at hand and provides a clear, concise, sustainable opinion as...
Our team advises at all stages of a litigation dispute, taking an independent view while gathering and reviewing evidence and contributing to expert reports.
Our M&A team works with clients to achieve a full or partial sale of their business, to ensure achievement of strategic ambitions and optimal outcomes for stakeholders.
Our operational deal services team helps to ensure the greatest possible outcome and value is gained through post merger integration or post acquisition integration.
As environmental, social, and governance (ESG) considerations become increasingly pivotal for dealmakers in Australia, it is important for investors to feel confident in assessing transactions through an ESG lens.
On 10 October 2024 the Treasury Laws Amendment (Mergers and Acquisitions Reform) Bill 2024 (the Bill) was tabled in the Australian Parliament in an effort to overhaul Australia’s mergers and acquisition laws. The bill was passed by both houses of Parliament on 28 November 2024.
Our finance and funding team works to access sources of finance, present your case to potential funders and negotiate a long-term sustainable relationship.
We provide effective and strategic corporate finance services across all stages of investments and transactions so clients can better manage costs and maximise returns.
We work closely with clients and lenders to provide holistic debt advisory services so you can raise or manage existing debt to meet your strategic goals.
Our proven methodology identifies opportunities to improve your processes and optimise working capital, and we work with to implement changes and monitor their effectiveness.
Merger & Acquisition (M&A) and equity market activity in the Agribusiness, Food & Beverage (Ag, F&B) sector is undergoing a strategic shift, as investors have become more selective and increasingly cautious in response to global economic uncertainty.
Our insolvency teams takes a proactive approach so our clients have access to more business turnaround options and retain the most value for all stakeholders.
Rising costs, supply chain disruptions, and shifting consumer behaviour are pushing many retailers to the edge. Taking immediate action to reduce operational expenses and prioritise cash flow management can give businesses the breathing room they need. Retailers must adapt quickly to survive these challenging market conditions and avoid insolvencies.
We help clients improve commercial performance, profitability and address challenges after internal or external triggers require a major business model shift.
We provide strategic director advisory services in times of business distress to help directors navigate issues and protect their company and themselves from liability.
We work closely with clients and lenders to provide holistic debt advisory services so you can raise or manage existing debt to meet your strategic goals.
Rising costs, supply chain disruptions, and shifting consumer behaviour are pushing many retailers to the edge. Taking immediate action to reduce operational expenses and prioritise cash flow management can give businesses the breathing room they need. Retailers must adapt quickly to survive these challenging market conditions and avoid insolvencies.
We work with private businesses across Australia – and internationals looking to Australia for their investments and operations – on all accounting and...
Our outsourced CFO services provide a full suite of CFO, tax and finance services and advice to help clients manage risk, optimise operations and grow.
Having a considered and informed ESG response has never been more important for all organisations as we are seeing awareness of the elements of ESG continue to...
There is a growing demand for organisations to provide transparency on their commitment to sustainability and disclosure of the nonfinancial impacts of their business activities. Commonly, the responsibility for sustainability and ESG reporting is landing with CFOs and finance teams, requiring a reassessment of a range of reporting processes and controls.
With the ESG and sustainability landscape continuing to evolve, we are focussed on helping your business to understand what ESG and sustainability represents and the opportunities and challenges it can provide.
As the demand for organisations to prepare information in relation to ESG & sustainability continues to increase, through changes in regulatory requirements or stakeholder expectations, there is a growing need for assurance over the information prepared.
As environmental, social, and governance (ESG) considerations become increasingly pivotal for dealmakers in Australia, it is important for investors to feel confident in assessing transactions through an ESG lens.
Money and finances can often be a sensitive and discreet topic in families, but what about families that own and operate a family business? Discussions about money can often begin around the dinner table, with even very young children receiving pocket money in exchange for chores.
Investment and business opportunities in Vietnam are expanding rapidly, driven by new markets, diverse industries, and Vietnam's growing role in export manufacturing, foreign investment, and strong domestic demand.
Treasury is taking steps to ensure fairer tax treatment for foreign resident investors by tightening Australia's foreign resident Capital Gains Tax (CGT) regime. Proposed changes aim to broaden the CGT base and enhance integrity, impacting infrastructure, energy, agriculture, and more.
Merger & Acquisition (M&A) and equity market activity in the Agribusiness, Food & Beverage (Ag, F&B) sector is undergoing a strategic shift, as investors have become more selective and increasingly cautious in response to global economic uncertainty.
Treasury is taking steps to ensure fairer tax treatment for foreign resident investors by tightening Australia's foreign resident Capital Gains Tax (CGT) regime. Proposed changes aim to broaden the CGT base and enhance integrity, impacting infrastructure, energy, agriculture, and more.
Following the recent removal of tariffs on Australian wine by China, the industry is keen to rebuild relations and explore the right export markets. This presents Australian wine producers with a chance to reassess their position in the global market.
From an active natural resources M&A market, a growing energy and renewable energy market, to new technologies and export and trade agreements – we have the...
At Grant Thornton we do things differently because we understand that when you strive for better and care about what you do remarkable things are possible.
The compelling client experience we’re passionate about creating at Grant Thornton can only be achieved through our people. We’ll encourage you to influence how, when and where you work, and take control of your time.
At Grant Thornton, we strive to create a culture of continuous learning and growth. Throughout every stage of your career, you’ll to be encouraged and supported to seize opportunities and reach your full potential.
To be able to reach your remarkable, we understand that you need to feel connected and respected as your authentic self – so we listen and strive for deeper understanding of what belonging means.
We’re passionate about making a difference in our communities. Through our sustainability and community engagement initiatives, we aim to contribute to society by creating lasting benefits that empower others to thrive.
As a new graduate, we aim to provide you more than just your ‘traditional’ graduate program; instead we kick start your career as an Associate and support you to turn theory into practice.
Foreign private equity (PE) investors need to be aware of new tax laws in Australia which may add complexity and time pressure when executing a transaction. This paper discusses some of these topical Australian tax issues impacting foreign PE investors.
Foreign Investment Review Board (FIRB) conditions
Background
Under specific tax laws applying to foreign entities undertaking acquisitions in Australia, there may be a requirement to seek a ‘no objection’ approval from the FIRB.
The government has been growing FIRB’s compliance arm for several years. The Australian Taxation Office (the ATO) has a dedicated team that is consulted by the FIRB when an application is made to the FIRB. The ATO will provide a risk rating of ‘low’, ‘medium’ or ‘high’. Among other factors, this rating will be based on the structure being used by the PE investor.
Based on this assessment, the FIRB can apply ‘standard’ tax conditions to the application. Further, if a proposed investment is considered to have a significant or high tax risk, then ‘additional’ tax conditions may also be imposed. If tax conditions are imposed, investors will have reporting and compliance obligations.
The investor may need to supply certain information, enter into good faith negotiations with the ATO for an advance pricing arrangement, to request a private binding ruling, or to take other action to resolve tax issues.
Foreign investors will be expected to work with the ATO in complying with any conditions. The final investment approval will be subject to the tax conditions being met and the investor being able to demonstrate compliance.
What does the FIRB look for in relation to tax issues?
On recent transactions, foreign private equity funds looking to invest in Australian assets are being imposed with unprecedented tax disclosures and stricter tax conditions.
FIRB can request ‘all tax advice’, including draft versions be provided. Documents reviewed will include ‘all step plans, diagrams, agreements, financial models and documents explaining commercial rationale.’ There has also been a trend on private equity deals, for an extra tax condition – ‘to inform the ATO/FIRB in advance before looking to exit from the investment.’
Funds with structures in tax havens can be being asked to justify the rationale for the use of such structures. The broad line of enquiry is to consider if a ‘reasonable amount of tax’ is paid somewhere in the world.
Since 1 July 2023 foreign investors are required to register a broad range of assets with the ATO. The registration is done via an online portal and within 30 days of acquiring the asset. The registration process is complex, and we have seen numerous challenges where foreign persons attempt to access to the Online Services system.The ATO has now commenced reviewing the portal. Potential penalties for non-compliance can be punitive.
Recent changes have been announced whereby a more risk-based approach is taken on applications. More resources will be devoted to high-risk applications. Foreign investment proposals with certain tax characteristics likely to be considered higher risk, include:
internal reorganisations
pre-sale structuring of Australian assets that present risks to tax revenue on disposal by private equity or other investors;
the use of related party financing arrangements to reduce Australian income tax or avoid withholding tax (noting the recent strengthening of Australia’s thin capitalisation rules);
facilitation of migration of assets (for example, intellectual property) to offshore related parties in jurisdictions with effective low taxation; and
investments that are structured through effective low or no tax jurisdictions where there is limited relevant economic activity taking place.
Income versus capital gains
One of the more difficult areas of Australian tax law is the capital-income dichotomy. This applies not just to private equity but to all taxpayers. For PE transactions the question is, will a future exit be on capital account or income account?
The legislation does not contain a bright line test, and the Australian tax system has relied on court decisions which have provided the relevant criteria used to analyse against the facts. It can be difficult to conclude without some uncertainty remaining. Advisers generally need to weigh up all relevant facts and circumstances against the case law guidance.
In relation to private equity investments, the ATO acted a few years ago against a fund managed by Texas Pacific Group (TPG) in relation to the sale of shares in Myer. Following the TPG case, the ATO issued a Tax Determination (TD 2010/21), which considered that a gain in a PE transaction can be classed as a revenue gain if examination of the facts and circumstances show that it is, broadly, a business gain or an isolated transaction to make a profit or gain or made in carrying on a commercial transaction.
The Commissioner’s default position is that gains on disposal of investments by PE entities are characterised as ordinary income for tax purposes rather than capital, unless the Commissioner can be convinced otherwise based on the particular facts and circumstances.
The Tax Determination noted that the revenue/capital classification will ‘depend on the circumstances of each particular case’, assessing the significance of the gain on disposal against other benefits from the investment including dividend flows and cash flow from operations.
Capital Gains Tax (CGT)
Where a foreign resident PE firm makes a gain from exiting their investment in Australia and the gain is on capital account, the next question is whether the non-resident disregard the capital gain.
Foreign residents continue to have access to an exemption from Australian CGT in respect of gains on sale of Australian shares where the underlying business does not have a close economic connection to Australian land and/or natural resources. This is consistent with international practice and Australia’s international tax treaties.
Specifically, the CGT exemption rules can apply to disregard a capital gain or capital loss on disposal of Australian shares made by a foreign resident if – less than 50 per cent of the value of the Australian shares were derived from real property such as land, an interest in land or mining rights.
In September 2024, significant changes are proposed to the foreign resident CGT reduction regime. Treasury is of the view that the definition of ‘real property’ as currently applied does not adequately capture assets with a close economic connection to Australian land and/or natural resources. Examples are tangible assets such as telecommunications or energy infrastructure and intangible assets such as water rights or pastoral leases. Investors in these sectors should monitor the impact of these changes closely.
FRCGW tax is applied to foreign resident PE sellers who dispose certain taxable property, including taxable real property with a value of $750,000 or more, and other assets such as indirect Australian real property interests in Australian entities.
Currently, the regime obliges purchasers to withhold 12.5 per cent of the purchase price from the vendor, and instead remit that to the ATO. At the time of writing (September 2024) the Government has announced the FRCGW tax rate will be increased from 12.5 per cent to 15 per cent and the withholding threshold will be reduced from $750,000 to $0.
Foreign PE sellers need to be aware that the purchaser may need to withhold 12.5 per cent from the purchase price. Steps can be taken to remove this withholding where the PE seller does not have an Australian tax liability from the sale.
Income gains
Where a foreign resident PE firm makes a gain from exiting their investment in Australia and the gain is on income account, the next question is whether the non-resident can disregard the gain under any applicable double tax treaty.
The Permanent Establishment article of most tax treaties broadly provides, that the profits of a foreign private equity entity shall not be taxable in Australia unless the entity has a permanent establishment in Australia.
Australia’s Tax Treaties can have a Principal Purposes Test (PPT) test under which treaty benefits can be denied if, ‘it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes…’
Accordingly, where one of the principal purposes of an arrangement is to obtain the relevant treaty benefit and another of its principal purposes is to achieve a particular commercial objective, the test for denial of benefits will be met, without the need to determine which purpose is dominant. It is not a sole, dominant or primary purpose test.
On the other hand, where the arrangement can be fairly described as an ordinary commercial dealing and its form has not been driven by considerations around treaty benefits, the arrangement will not have the requisite purpose even though its effect is to obtain treaty benefits.
Further, the ATO has also issued a Tax Determination (TD 2010/20) stating that the involvement of tax treaty entities in international ownership chains can be disregarded by the ATO under the general anti avoidance provisions in the Tax Act (Part IVA). The Determination notes that where an arrangement is put in place merely to attract the operation of a particular tax treaty any tax benefits obtained in relation to such scheme may be cancelled.
At a practical level, it means:
Having real business or substance in that inbound jurisdiction should help a taxpayer to pass the PPT and the Part IVA tests. The exercise of economic functions using assets and assuming risks are key business functions. In a PE context, these functions will be exercised by local directors of the entity.
The company should maintain all records and evidence supporting its commercial purposes for choosing the appropriate jurisdiction. This is a highly fact and evidence-based area. Further, the PPT provisions are new and untested with evolving interpretations.
For absolute certainty, there is the option to a obtain private ruling from the ATO.
If the gain is on revenue account and treaty relief is not available (e.g. the ATO considers treaty shopping had occurred) the gain will only be taxable in Australia to the extent that the profits are from an Australian ‘source’. The source of the gain must be determined having regard to all the facts and circumstances of the particular case.
It’s not helpful that there is no definition in the Australian Tax Act as to how the source of a gain should be determined instead release is place on published guidance and decided cases.
In the context of the sale of shares, the question of ‘Australian source’ is not dependent solely on where purchase and sale contracts are executed. Rather, it must be determined having regard to all the facts and circumstances.
Based on case law in the area, some of the factors that must be considered when determining source are:
the activities undertaken by the PE Group, in making any improvements to the Australian corporate group;
where those activities are undertaken;
the nature of any agreements between the parties;
the extent and nature of any control or involvement in the management of the Australian corporate group;
where the purchase contracts and sale contracts are executed;
the form and substance of the purchase payments.
The significance of the activities undertaken in Australia, relative to the profit
If the business strategy of the PE involves substantial activity in Australia including undertaking ‘active management’ in Australia of the investee company including its ultimate disposal, it is likely that the ATO will take the view the gain on disposal is from an Australian source.
GST
There are several GST implications surrounding foreign investments into Australia that can lead to risks of material tax shortfalls and ATO compliance activity when overlooked in the planning stages. As GST is a ‘transactional’ tax, it is necessary to consider the GST-related impact of each step within a transaction process. Any entities making ‘supplies’ for GST purposes will need to ensure that GST is being reported correctly on taxable supplies that may be made as part of the transaction process. For example, transfers of assets, even if they are part of a broader transaction that involves making financial supplies (such as share and unit transfers), can be subject to GST.
While GST is not applicable to financial supplies, investors will need to ensure that the correct GST treatment is being applied on transaction costs as the GST rules operate to restrict an entity’s entitlement to claiming GST credits on costs that are subject to GST, to the extent that those costs are incurred for the purposes of making financial supplies (for example, Australian legal fees incurred by an entity acquiring shares in another Australian company).
There are complex GST rules and stringent anti-avoidance measures that apply in this space, particularly in relation to cost recharges and even acquisitions of services from non-resident vendors that may be subject to ‘reverse charge GST’ that must be self-assessed by the entity incurring the cost.
Conclusion
The Australian Taxation Office continues to focus heavily on tax structures that are put in place for foreign PE investment into Australia. In addition, if FIRB approval is needed, there will be ATO/FIRB review of the proposed structure. FIRB will likely review all tax advice received and seek to impose tax conditions to approvals.
Australia has stringent treaty shopping and anti-avoidance laws; investors should ensure they obtain tax advice from an early stage to ensure compliance with all aspects of Australian tax laws.
Learn more about how our Tax services can help you
The information contained in this site is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it appears in this site or that it will continue to be accurate in the future. For more information, click here.
The Tax Practitioners Board maintains a register of tax agents and BAS agents. You can access and search this register here.
Your engagement letter with Grant Thornton and the Standard Terms and Conditions set out our procedures for dealing with problems or complaints. The Tax Practitioners Board also has a complaints process in relation to tax agent services as outlined on their website which can be accessed here.
Section 45 of the Tax Agent Services (Code of Professional Conduct) requires Grant Thornton to notify you if it becomes aware of any matter which could significantly influence your decision to engage us or to continue to engage us in relation to the provision of tax agent services. Grant Thornton is not aware of any such matters.
The ATO has tightened exemption criteria for country-by-country reporting, effective January 1, 2024. Taxpayers will need to submit more information, aligning with the ATO's focus on international tax risks and local file reporting.
The ATO has increased local file reporting requirements to better understand international tax risks. These changes apply from 1 January 2025, for periods starting on or after 1 January 2024. CbCREs will need more time and resources to comply.
Australia's Parliament has passed the Pillar Two rules, aligning with the OECD's global initiative to establish a 15% minimum tax rate for large multinational enterprises (MNEs).
Subscribe now to be kept up-to-date with timely and relevant insights, unique to the nature of your business, your areas of interest and the industry in which you operate.
