ATO releases final determinations on the treatment of gains made by non-resident private equity investors
The Australian Taxation Office (ATO) has finalised two tax determinations relevant for the taxation of gains made by other non-resident investors.
Tax determination (TD) 2011/24 – Determining the source of income
TD 2011/24 confirms the ATO view that the source of profit derived by a non-resident from the sale of shares in an Australian corporate group, which is acquired in a leveraged buy-out by a private equity fund, is not dependent solely on where the purchase and sale contracts are executed.
In this determination, the Commissioner of Taxation outlines the following factors which will need to be addressed in order to conclude the source of income:
the location of activities undertaken by the fund, or on the fund’s behalf by an Australian advising entity owned or controlled by the private equity firm, in making any improvements to the Australian investee group;
the nature of any agreements between the entities (with a focus on local advisory companies that may source and negotiate domestic bank funding, provide management support activities, etcetera);
the extent and nature of any control or involvement in the management of the Australian investee group;
where the purchase contracts and sale contracts are executed;
the form and substance of the purchase payments;
accordingly, the significance of the activities undertaken in Australia, relative to the profit, will be examined and the source of income will then be determined. This suggests a weighting of relative factors, but without an indication of which factors are considered to be of greater or lesser importance.
TD 2011/25 – Look-through approach
TD 2011/25 confirms the Commissioner’s view that the business profits article can apply to the Australian sourced business profits of a foreign limited partnership (LP) where the LP is treated as fiscally transparent in a country with which Australian has entered into a double tax agreement (DTA) and the LP’s partners are residents of that DTA country.
In the Determination, the Commissioner acknowledges the principles of the OECD partnership report (which provide for a look through approach to the ultimate investor in partnerships for the purposes of treaty benefits) are recognised as inherent in Australia’s broader treaty network.
What this Determination means, for certain foreign taxpayers looking to invest in Australia, is that the practical requirement of using a vehicle in a jurisdiction that does not have a treaty with Australia (such as the Cayman Islands), does not necessarily prevent protection from double taxation under a relevant DTA.
The Determination does not address whether the look through principle applies to sovereign wealth funds investing in Australia through fiscally transparent LPs.
Ian Farmer (firstname.lastname@example.org)
Tel: +61 2 8266 2802
Fax: +61 2 8286 2802