Australia: CGT, tax consolidation changes and RCF IV appeal

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Australia: CGT, tax consolidation changes and RCF IV appeal

intl-updates

ATO appeals RCF IV decision

The Federal Commissioner of Taxation has appealed against the decision in the RCF IV case (Resource Capital Fund IV LP v FCT [2018] FCA 41). In that case, the Federal Court had held that the gains derived by two private equity funds, which were Cayman Islands limited partnerships, from the sale of shares in an Australian mining company were not subject to Australian income tax, on the basis that the Australia-US double tax treaty applied in respect of the US tax resident limited partners of the funds to exempt the gains from Australian taxation.

In particular, the Federal Court held that the Cayman Island limited partnerships were not taxable entities under Australian law, notwithstanding that the limited partnerships were generally treated as companies under Australian domestic tax law. The court held that the limited partners of the Cayman Island limited partnerships were the taxable entities (i.e. the parties liable to income tax) and thus were entitled to benefits under Article 7 (Business Profits) of the Australia-US double tax treaty in respect of such gains.

The Federal Court also held that the provisions of Article 13 (Alienation of Real Property) of the treaty did not apply, on the basis that the majority (by value) of the assets of the Australian mining company did not comprise taxable Australia real property assets.

The RCF IV case is important as it confirms the market practice in Australia that treaty resident investors can rely on the relevant tax treaty in respect of gains derived from Australian investments held via limited partnerships (or other fiscally transparent entities) that were established in a non-treaty country. However, the decision did raise some uncertainty as to whether such foreign investors would need to lodge Australian tax returns or otherwise register for Australian tax purposes on the basis that they were taxable entities in Australia.

Foreign investors and fund managers that have investments in Australia should monitor the progress of the commissioner's appeal and any impact that it may have on the tax profile of their Australian investments.

Further restrictions on capital gains tax concessions for foreign restrictions

Further to the removal of capital gains tax (CGT) discount and the introduction of a CGT withholding tax for foreign investors in recent years, the Australian government has now proposed further rules to limit the availability of CGT concessions for foreign investors, which:

  • Remove the availability of the CGT main residence exemption for foreign residents; and

  • Amend the foreign resident CGT exemption rules in respect of 'indirect interest Australian real property interest' (IARPI), being certain membership interests in an entity that owns substantial real property assets in Australia. Under the proposed amendments, interests held by the foreign residents associates will also be relevant in determining whether the membership interests held by the foreign resident constitute IARPI.

These measures are to apply from May 9 2017, being the date they were first announced by the Australian government.

Tax consolidation integrity measures

On February 15 2018, the Australian government released draft legislation to close certain loopholes and address uncertainties in the Australian tax consolidation regime. The various amendments are targeted at very specific issues, such as:

  • Removing the potential double benefit in respect of certain liabilities (that are deductible for tax purposes) of an entity that joins a consolidated group;

  • Disregarding deferred tax liabilities in the tax cost setting rules for entities that join a consolidated group;

  • The 'anti-churning rule', which is aimed at preventing tax consolidated groups from resetting the tax cost of an entity's assets that joined the group under certain transactions involving a foreign resident related party; and

  • Clarification of the treatment of certain assets and liabilities (e.g. financial assets and pre-consolidation intercompany assets) in the exit tax cost setting amount calculations.

These measures have retrospective effect, broadly from the date they were originally announced by the Australian government.

Purchasers and vendors of Australian companies should take into account these new integrity measures when dealing with Australian tax consolidated groups.

ahn.jpg

Eddie Ahn (eddie.ahn@dlapiper.com)

DLA Piper Australia

Tel: +61 2 9286 8268

Fax: +61 2 9286 8007

Website: www.dlapiper.com

more across site & shared bottom lb ros

More from across our site

Veteran Elizabeth Arrendale will lead the new advisory practice, which will support clients with M&A tax structuring, post-deal integration, and more
MAP cases keep increasing, and cases closed aren’t keeping pace with the number started, the OECD’s Sriram Govind also told an ITR summit
Nobody likes paperwork or paying money, but the assertion that legal accreditation doesn’t offer value to firms and clients alike is false
Ryan hopes the buyout will help it expand into Asia and the Middle East; in other news, three German finance ministers have called for a suspension of pillar two
SKAT, which was represented by Pinsent Masons, had accused Sanjay Shah and other defendants of fraudulent dividend tax refund claims
TP managers must be able to explain technical issues in simple terms, ITR’s European Transfer Pricing Forum heard
Prudential had challenged HMRC over VAT group relief; in other news, Donald Trump unveiled timber and wood tariffs, and the European Commission published a ViDA implementation strategy
Australia’s CbCR rules have ‘widespread support’ and do not put American companies at a competitive disadvantage, the FACT Coalition said
Baker McKenzie advised two of the member firms involved, while several advisers provided transaction counsel to US-based Grant Thornton Advisors
Foreign remittance requirements put additional administrative burden on Indian law firms and strain their relationship with foreign associate firms, according to practitioners
Gift this article