Following further consultation, final legislation to
implement a diverted profits tax (DPT) in Australia has been
introduced into parliament.
The legislation is largely consistent with the earlier
exposure draft, although certain additions and carve outs (e.g.
for sovereign wealth funds and foreign pension funds) have been
made to the final legislation.
The key purposes of the DPT (modelled on the second limb of
the UK DPT) are to ensure that the Australian tax payable by
"significant global entities" (global groups with annual
turnover of at least AU$1 billion ($750 million)) properly
reflects the economic substance of the activities those
entities carry on in Australia, and to prevent those entities
from reducing the amount of Australian tax they pay by
diverting profits offshore through contrived arrangements
between related parties.
If passed in its current form, the DPT will apply to income
years starting on or after July 1 2017.
Taxation of hubs
The Australian Taxation Office (ATO) has also released
Practical Compliance Guideline PCG 2017/1 in relation to the
ATO's approach to the transfer pricing issues arising for the
use of offshore centralised operating models or "hubs".
This follows concerns publicly expressed by the ATO about
the use by multinationals (especially large Australian mining
companies) of sales and marketing hubs based in lower tax
jurisdictions (such as Singapore) to shift profits out of
Australia. This is achieved through the payment of high fees to
offshore associates that provide centralised services to
Australian businesses (without substantially altering any goods
PCG 2017/1 provides a framework for hub risk assessment to
assist taxpayers to manage the compliance risk of their hubs
and understand the ATO's compliance approach for hubs. This
includes the criteria the ATO consider when categorising the
level of risk of a hub. The higher the risk rating, the higher
the priority for an ATO review. Risk ratings can be decreased
through certain types of "good behaviour", such as preparing
appropriate transfer pricing documentation or ensuring the
pricing of transactions with hubs is within certain
The ATO also outlines what taxpayers can expect by way of
ATO compliance activities if their hub is inside or outside the
"green" safe zone and provides guidance for preparing transfer
pricing analysis. This should be read in the context of the
DPT, which could alter how the ATO would in practice pursue a
high risk hub (and the penalties involved).
The ATO has released a controversial Taxpayer Alert TA
2017/1: Re-characterisation of income from trading businesses,
signalling its intention to review the "stapled structures"
commonly used by foreign and Australian investors in a variety
of projects. The ATO is concerned by the use of stapled
structures to artificially fragment integrated trading
businesses in order to re-characterise trading income into more
favourably taxed passive income.
This could potentially impact stapled structures used in a
number of contexts, including infrastructure projects such as
energy, toll roads, telecommunications and ports. Stapled
structures are also common in the real estate sector and in
privatisations but these are excluded from TA 2017/1.
TA 2017/1 describes the different types of stapled
structures that will be targeted. These typically have the
- A flow-through trust (asset trust) that
holds "passive" assets, such as land and fixtures, is stapled
to another entity (operating entity);
- The operating entity leases the passive
assets from the asset trust (for a fee) and operates the
business of the stapled group; and
- The asset trust may qualify for a
concessional withholding tax rate of 15% on distributions of
profit to non-resident investors. The operating entity is
taxed at the standard company tax rate of 30% but has minimal
profit due to the lease payments.
In such instances, the ATO is considering a number of ways
to eliminate the tax benefits of the stapled structure,
including denying the flow-through status of the asset trust
(so that it is taxed like a company) and applying the general
tax anti-avoidance rules.
This opens up practical difficulties and may signal a
departure from past practice, as stapled structures have been
used for many years and previously accepted by the ATO. Going
forward, the ATO's position will be closely scrutinised as it
continues to develop its position and provides further
Michael Yunan (firstname.lastname@example.org)
DLA Piper Australia
Tel: +61 3 9274 5007