In recent months, there have been several important tax
developments driven by the Australian Taxation Office (ATO)
that are relevant to inbound distributors, multinationals and
ATO guidance on transfer pricing risks for inbound
On November 23 2018, the ATO released a draft practical
compliance guideline (PCG) 2018/D8 that outlines the intended
compliance approach to transfer pricing issues related to
"inbound distribution arrangements". The draft provides a
framework for "inbound distributors" to assess their potential
risk of an ATO transfer pricing review against specific "profit
markers". The draft applies to Australian entities engaged in
the distribution of:
- Goods purchased from related foreign
entities for re-sale; and/or
- Digital products or services where the
intellectual property in those products or services is owned
by related foreign entities.
The draft guideline provides "profit markers" for inbound
distributors in the information and communication technology
(ICT) industry, life sciences industry, motor vehicles industry
and a catchall "general distributors" category.
ATO guidance for hybrid mismatch rules
In December 2018, the ATO issued draft PCG 2018/D9 and draft
law companion ruling (LCR) 2018/D9 to provide guidance on the
recently enacted hybrid mismatch rules, which came into effect
on January 1 2019.
Draft LCR 2018/D9 discusses the key terms "structured
arrangement" and "party to the structured arrangement". Draft
PCG 2018/D9 contains proposed practical guidance to help
taxpayers determine whether the structured arrangement
definition is satisfied and, if so, whether an entity is a
party to the arrangement.
High Court decision on the valuation of goodwill
On December 5 2018, the High Court of Australia handed down
its decision in Commissioner of State Revenue v Placer
Dome (Inc  HCA 59), which addressed the imposition
of Western Australia's (WA) land rich duty in respect of the
acquisition of Placer Dome Inc, a mining company in 2006.
This case concerned the nature and value goodwill for legal
purposes (as opposed to accounting purposes), and whether
certain valuation methodologies are appropriate in ascertaining
the value of land.
In summary, the High Court held that goodwill for legal
purposes only includes sources which generated or added value
(or earnings) to a business by attracting custom, such as from
assets, locations, people, techniques, etc.
The High Court's decision means that it may be difficult for
taxpayers in the mining/commodity industries to argue that they
have any material recognisable legal goodwill.
The High Court made a number of observations with regards to
- A 'top-down approach' to valuing land
(i.e. by subtracting the value of all non-land assets from
the total consideration paid for the shares in Placer, and
the residual value is attributable to the land) is
appropriate for the purposes of the land-rich duty
- Goodwill has no existence independently of
the conduct of a business, and goodwill cannot be severed
from the business which creates it; and
- The High Court cautioned against
attributing a value to goodwill which already inheres in an
asset (e.g. land), which is a source of goodwill.
Foreign-incorporated companies: ATO guidance on residency
On December 20 2018, the ATO finalised PCG 2018/9 to provide
guidance to foreign-incorporated companies on applying the
central management and control (CM&C) test of
The guideline provides a transitional period ending on June
30 2019 for taxpayers to make changes to governance
arrangements so that CM&C is exercised outside
Debt/equity and cross-border financing
The ATO has recently released a number of materials relevant
to cross-border financing:
- Draft taxation determination (TD) 2018/D6,
released on October 31 2018, which considers the interaction
between the debt and equity rules and Australia's transfer
- Draft taxation ruling (TR) 2005/5DC,
released on November 28 2018, which considers the right to
tax UK and US financial institutions on interest income
arising in Australia. The ruling focuses on the definition of
"financial institution" in Australia's double tax agreements
with the US and UK; and
- Taxpayer Alert (TA) 2018/4, released on
December 20 2018, which outlines the ATO's concern on
tax-driven cross-border financial arrangements where
deductions are claimed in Australia (on an accruals basis),
but without triggering Australian withholding tax.
Update to list of exchange of information (EOI)
On November 23 2018, the Australian government included an
additional 54 new countries as EOI countries in the Taxation
Administration Regulations 2017.
Residency in an EOI country is the key condition for
investors to benefit from the concessional managed investment
trust (MIT) withholding tax rate of 15% (or in certain cases
10%), in respect of qualifying MIT distributions.