Restructures in response to new thin capitalisation rules
Broadly, as a result of the new thin capitalisation regime and debt deduction creation rules (DDCR) that were enacted in April 2024, the Australian Taxation Office (ATO) issued a Draft Practical Compliance Guideline (Draft PCG 2024/D3) on October 9 2024. Draft PCG 2024/D3 sets out the ATO's compliance approach to reviewing arrangements that have been restructured in response to the DDCR, including for the potential application of the general anti-avoidance rules (Part IVA) and the DDCR specific anti-avoidance rules
The guideline establishes a risk assessment framework that sets out the matters the ATO will take into account in deciding whether to devote compliance resources to further examine a restructure.
White zone (further risk assessment not required) – the criteria for the white zone, which the ATO does not anticipate many taxpayers will meet, involve having a post-April 8 2024 settlement agreement or court decision covering the Australian tax outcomes under the DDCR, with no subsequent material change in the arrangement.
Yellow zone (compliance risk not assessed) – the yellow zone applies to restructures (including any part thereof) that do not fall within the green or red zones. The ATO may wish to engage with taxpayers in this category to understand the compliance risks of their restructures.
Green zone (low risk) – a taxpayer is in the green zone if the restructure is covered by a low-risk example in Schedule 2 to Draft PCG 2024/D3 and if the arrangements are otherwise commercial and on arm's-length terms, if any debt deductions that are disallowed by the DDCR prior to the restructure are accurately calculated, and if the ATO has provided a low-risk or high-assurance rating.
Red zone (high risk) – the ATO will prioritise its resources to review a restructure if it is covered by a high-risk example in Schedule 2 to Draft PCG 2024/D3 or a high-risk or low-assurance rating from the ATO. The ATO "will generally tell" the taxpayer if it intends to commence an examination involving the DDCR anti-avoidance rule or Part IVA.
The PCG provides the following examples of certain restructures:
Low-risk restructures – these include repaying the debt interest, disposing of foreign assets, and terminating swaps, provided they meet certain criteria.
High-risk restructures – these involve arrangements in which debt deductions are expected to be disallowed and similar deductions are claimed under restructured arrangements. Examples of high-risk arrangements include round-robin financing, change in 'use' of debt under related-party arrangements, and certain contrived arrangements, such as debt 'dumping' into Australia.
Further details on the ATO’s view of risks from restructures will be published as a new Appendix 3 to the guideline.
The Draft PCG 2024/D3 is open for comments until November 8 2024. When finalised, the PCG will apply to restructures entered into on or after June 22 2023.
The CCIV regime
On October 2 2024, the ATO finalised Law Companion Ruling (LCR) 2023/D1 in the form of LCR 2024/1, which explains various key aspects of the taxation of corporate collective investment vehicles (CCIVs). The final LCR sets out the key tax rules that apply to CCIVs, including the following:
Taxation on a flow-through basis, with investors assessed as beneficiaries (and not shareholders). The key deeming rule creates a trust relationship between the CCIV (a legal form company) and those investors who hold shares referable to a particular sub-fund.
Each sub-fund is deemed to be a separate unit trust (a CCIV sub-fund trust). The ATO says that this deeming principle requires each CCIV sub-fund to be viewed as a trust for tax purposes. As a result, a deemed CCIV sub-fund trust is recognised as a separate tax entity (despite lacking legal personality).
The ATO notes that because these deeming rules apply for the purposes of "all taxation laws", they are intended to have "wide operation" (subject to certain limits on deeming).
Where the CCIV sub-fund trust qualifies as an attribution managed investment trust (AMIT), the tax outcomes for investors are the same as those applying to investors in other AMITs. If the AMIT eligibility criteria are not met, the trust income is dealt with in accordance with the general trust provisions (or the public trading trust rules if the CCIV sub-fund trust is a public trading trust).
The CCIV regime also includes additional deeming rules to ensure the general trust rules operate appropriately, particularly with respect to the concept of present entitlement. The key rule is that an investor's present entitlement is based on dividends declared during or within three months of the end of the income year.
