Consistent with prior years, corporate tax work in Australia during the 2023–24 year continued to be focused on improving compliance, enhancing transparency and closing tax loopholes. Like our international counterparts, the Australian Government is acutely focused on multinationals and ensuring that large public and private businesses pay their “fair share of tax”.
Corporate tax compliance activity remained strong in the 2023–24 year. Engagement by the Australian Taxation Office (ATO) is not expected to slow down, and taxpayers should expect the same level of compliance and review activity in the current and coming years.
The Tax Avoidance Taskforce, established in 2016, continues its regular compliance programmes and review activity. The Taskforce has a strong focus on the top 1,100 public and multinational businesses and top 500 and next 5,000 privately owned groups, which together are responsible for generating more than two-thirds of all corporate tax. As part of the 2024–25 Federal Budget (Budget), the Tax Avoidance Taskforce will be extended for a further two years from 1 July 2026, and is expected to increase receipts by A$2.4 billion and payments by A$1.2 billion over five years from 2023–24.
From a legislative perspective, the Treasury Laws Amendment (Making Multinationals Pay Their Fair Share – Integrity and Transparency) Bill 2023 (Integrity and Transparency Act) passed both Houses of Parliament on 27 March 2023, and became law on 8 April 2024.
One of the key measures in the Integrity and Transparency Act is the introduction of the multinational tax transparency measures requiring the disclosure of certain information about subsidiaries by Australian public companies (listed and unlisted) in their financial reports for financial years commencing on or after 1 July 2023. In a similar vein, the Treasury Laws Amendment (Responsible Buy Now Pay Later and Other Measures) Bill 2024 was introduced into the House of Representatives on 5 June 2024. If passed, these measures require certain large multinationals to publicly disclose certain tax-related information on a jurisdiction-by-jurisdiction basis.
Australia has arguably one of the most complex tax systems by international standards and a highly sophisticated and active tax authority, being the ATO. The 2023–24 year saw significant headway on a number of key tax measures affecting corporates, including:
Australia continues to actively engage with the OECD in developing rules to address tax challenges arising from the digital economy.
In light of the 2023–24 corporate tax landscape, we discuss below a number of the key developments over the past year that are relevant to domestic and international corporates.
A number of key legislative changes were announced as part of the Budget, including a measure to strengthen the foreign resident CGT exemption regime. While there are currently no specific details on the new laws themselves, the Federal Government has publicly announced in the Budget that:
As mentioned above, the Transparency and Integrity Act became law as at 8 April 2024. This Act contained a number of significant changes to Australia’s thin capitalisation rules (being Australia’s debt deduction limitation rules). These new laws apply for income years commencing on or after 1 July 2023.
Broadly, the new debt limitation rules that apply to “general class investors” are the:
The Act also introduced a new anti-avoidance rule targeted at debt deduction creation. This debt deduction creation rule denies deductions otherwise allowable under the thin capitalisation rules where the debt is created in connection with an acquisition from an associate entity or created to fund distributions to an associate entity. This new rule is coupled with an anti-avoidance measure designed to ensure that the debt deduction creation rule cannot be avoided.
The Treasury Laws Amendment (2023 Measures No. 1) Act (2023 Measures Act) was enacted in the 2023–24 year. One of the new measures that became law was to align the tax treatment of off-market share buy-backs undertaken by listed public companies with the tax treatment of on-market share buy-backs. Broadly, where a listed public company undertakes an off-market buy-back, no part of the purchase price will be taken to be a dividend.
As part of the 2016–17 Mid-Year Economic Fiscal Outlook, the Federal Government announced the intention to enact laws to prevent franking credits from attaching to a distribution where capital is raised for the purpose of funding the distribution. This measure, which was contained in the 2023 Measures Act, passed both Houses of Parliament on 16 November 2023 and received Royal Assent on 27 November 2023.
The ATO is continuing to target arrangements involving intangible assets for their perceived role in multinational profit shifting.
On 17 January 2024, the ATO released:
TR 2024/D1 replaces earlier tax rulings and takes an expanded view on the application of royalty withholding tax to amounts paid under software arrangements.
PCG 2024/1 sets out the ATO’s compliance approach to international arrangements connected with the development, enhancement, maintenance, protection and exploitation of intangible assets and/or the “migration” of intangible assets.
Based on PCG 2024/1, the ATO will place significant focus on the operation of both the transfer pricing rules and the general anti-avoidance rule (GAAR) in determining the level of risk attributed to the particular intangibles arrangement. The PCG introduces a risk framework, which allocates intangibles arrangements as either high, medium or low compliance risk.
Australia’s GAAR is contained in Part IVA of the Income Tax Assessment Act 1936 (Cth). Very broadly, these rules apply to arrangements that are entered into for the sole or dominant purpose of obtaining a tax benefit. If these rules apply, the tax benefit is nullified. Importantly, Part IVA is not restricted by the application of Australia’s tax treaties. Three prominent decisions concerning Part IVA were handed down in the 2023–24 year.
On 8 March 2024, the Full Court of the Federal Court of Australia (FCAFC) delivered its decision in Minerva, which rejected the Commissioner of Taxation’s (Commissioner) process of focusing on each of the eight Part IVA factors separately in favour of a holistic consideration.
The taxpayer was a member of the Liberty Group of companies and trusts that carried on a non-bank financial services business. In 2007, the Liberty Group undertook a restructure in preparation for an initial public offering (IPO) of stapled securities. The IPO did not proceed but the restructure was implemented.
As part of the restructure, all future securitisation trusts were established under the new Minerva Holdings Trust (the taxpayer was the trustee of this trust) (MHT) rather than under the main operating entity of the Liberty Group (Liberty Financial Pty Ltd) as had been done previously.
The Commissioner argued that the establishment of securitisation trusts under MHT had the effect of removing income that would have been derived within the corporate silo and instead having the income flow through the trust silo and ultimately to non-resident owners. The effect of this is that the income was subject to 10% withholding tax instead of 30% corporate tax rate that would have applied had the income continued to be derived in the corporate silo.
The FCAFC held that while Minerva obtained a tax benefit, the surrounding context did not support a conclusion that the scheme was carried out for a dominant purpose of obtaining a tax benefit.
The FCAFC allowed the appeal and determined that Part IVA did not apply to any of the schemes identified by the Commissioner.
Minerva confirms that:
Mylan Australian Holding Pty Ltd v Federal Commissioner of Taxation [2024] FCA 253 (Mylan)
On 20 March 2024, the Federal Court (FCA) delivered its decision in Mylan, which applied similar reasoning to the decision in Minerva.
The Mylan group acquired five group companies from the Merck Generics group. Alphapharm, one of the group companies, was acquired by Mylan Australia Pty Ltd. The purchase of Alphapharm was funded by equity (as to 25% of the purchase price) and an intercompany loan from a Luxembourg Mylan subsidiary at a fixed interest rate of 10.15% by way of promissory note (as to 75% of the purchase price).
The ATO issued amended assessments that disallowed approximately A$589 million of interest deductions that were claimed on the promissory note over a period of 10 income years. The interest deductions were initially denied under the transfer pricing rules; however, the Commissioner later decided that the deductions should be disallowed under Part IVA.
One of the key issues in this case was whether, objectively assessed, the deductions allowable under the preferred counterfactual would have been less than the deductions obtained under the scheme.
The FCA determined that the amended assessments denying the interest deductions under Part IVA were excessive.
Mylan confirms that:
Merchant v Federal Commissioner of Taxation [2024] FCA 498 (Merchant)
On 14 May 2024, the FCA handed down its decision in Merchant, which concerned the taxation affairs of Mr Gordon Merchant (who co-founded global surf-wear brand Billabong (BBG) in 1973) and his related entities.
Mr Merchant was the controlling mind of various Australian corporate entities, including GSM Pty Ltd (GSM). GSM was a beneficiary with entitlement to 100% of the income of the Merchant Family Trust (MFT). Mr Merchant retained a significant interest in BBG after it was listed on the Australian Stock Exchange in 2000. In 2010, MFT acquired Plantic Technologies Ltd (Plantic), which relied on the Merchant group for capital. Between 2011 and 2015, the Merchant group lent approximately A$55 million to Plantic (approximately A$50 million of the amount was provided by GSM).
In mid-2014, Mr Merchant was considering selling Plantic. Mr Merchant’s tax advisor advised him that the sale of Plantic could generate a substantial capital gain for MFT and recommended the following structure:
Among other issues considered, the FCA found that the predominant reason why GMSF acquired the BBG shares from MFT was to crystallise a loss in MFT that could be applied against the capital gain from MFT’s sale of its shares in Plantic, which resulted in a reduction in assessable income.
The FCA held that the Commissioner correctly applied the anti-avoidance provisions to cancel the tax benefit obtained by the taxpayer.
Mr Merchant has commenced separate proceedings against his tax advisor alleging that he received negligent advice. The decision in Merchant and the separate proceedings serve as a timely reminder to taxpayers to beware of committing to tax schemes and to obtain a second opinion from an independent tax advisor if they are unsure.
Singapore Telecom Australia Investments Pty Ltd v Commissioner of Taxation [2024] FCAFC 29 (Singtel)
On 8 March 2024, the FCAFC delivered its decision in Singtel, which reminds taxpayers to be prudent about the arm’s length terms of related party loans, including any variations that may occur over time.
The key issue was whether the taxpayer obtained a transfer pricing benefit, including:
The FCAFC upheld the appeal against the disallowance of A$894 million of interest deductions, which accrued on a A$5.2 billion loan that was used to fund the acquisition of Optus in 2001.
Singtel confirms that:
Australia is an avid adopter of many of the Base Erosion and Profit Shifting (BEPS) measures and, as part of the previous year’s Budget, announced that it will implement key aspects of the OECD’s Pillar Two framework. On 21 March 2024, Treasury released exposure draft legislation to implement the global and domestic minimum tax (DMT) for consultation. Based on the exposure draft legislation, the regime will incorporate a:
These rules will apply to multinational enterprise groups with consolidated annual revenue of at least €750 million (Applicable MNE Group).
The 15% global minimum tax should be imposed on Applicable MNE Groups via a “top-up mechanism” that would impose a top-up tax for the difference between the jurisdictional effective tax rate and the 15% minimum rate. The IIR will allow Australia to collect top-up tax where the group’s ultimate parent entity or intermediate parent entity is located in Australia. From 1 January 2025, the IIR will be accompanied by the UTPR. The UTPR is intended to act as a backstop if low-taxed income is not fully collected under the IIR.
The DMT would allow Australia to retain taxing rights over undertaxed Australian profits. In effect, Australia would be able to collect revenue that would otherwise have been collected by another country’s global minimum tax for Applicable MNE Groups that have an Australian tax rate of less than 15%.
The exposure draft provides that Australia’s Pillar Two rules are to be interpreted in a manner consistent with specified OECD documents, including the GloBE Model Rules, Commentary, Agreed Administrative Guidance and Safe Harbour Rules. Where there is an inconsistency, the Australian provisions would prevail.
As discussed above, on 5 June 2024, the Treasury Laws Amendment (Responsible Buy Now Pay Later and Other Measures) Bill 2024 was introduced into the House of Representatives.
A transparency measure within that legislation will apply to certain large multinational entities (referred to as “CbC reporting parent entities”), requiring them to publicly disclose certain tax-related information on a jurisdiction-by-jurisdiction basis.
Currently, large multinationals are subject to confidential CbC reporting. Under the new measures, multinationals would need to provide tax-related information in addition to what is already provided to the ATO and/or overseas tax authorities, and such information would be made available to the public. If enacted, the rules will commence from the first 1 January, 1 April, 1 July or 1 October after the legislation receives Royal Assent.
The information that would be disclosed publicly includes, on a CbC or aggregate basis (depending upon jurisdiction):
In line with the increasing momentum across Australia towards greater tax transparency, for income years commencing 1 July 2023, Australian public companies (both listed and unlisted) are required to make public tax-related disclosures for every subsidiary of the group.
The information required to be provided in the disclosure includes:
The directors, Chief Executive Officer and Chief Financial Officer of the Australian public company are required to declare that the disclosures are “true and correct”.
Australia has a foreign investment framework that gives the Treasurer the power to decide whether to:
The Treasurer is advised by the Foreign Investment Review Board (FIRB). Foreign investors in Australia are required to consider whether their investment meets the conditions in order to be considered as needing approval under Australia’s foreign investment review framework.
Broadly, foreign investors are required to notify the Treasurer of proposed foreign investments where certain criteria are met. The criteria that must be considered are wide-ranging and have changed numerous times since the introduction of the law. Whether a foreign investor is required to notify the Treasurer of their proposed investment will depend on a number of factors, including whether the investor is a foreign government or non-government investor, the type of acquisition, whether the investment is likely to raise national security concerns, the monetary thresholds relevant to the investment and whether any exemptions apply.
As part of the FIRB application process, extensive information is required to be provided to the Treasurer, including specific information in respect of tax. Information may also be requested by the ATO, particularly for large investment and infrastructure transactions. Standard tax information requests include:
Ultimately, the ATO provides input by providing a risk rating in respect of an application by a foreign investor.
Under the foreign investment framework, a wide array of tax conditions may be imposed on the proposed investment to manage the perceived tax risks. Where significant or particular tax risks are identified, the Treasurer also has the power to impose additional tax conditions. A common additional condition usually involves the applicant agreeing to comply with wide-ranging and onerous tax information requirements within a specified period of time. While the current FIRB guidance is that this additional information may be a post-completion condition, it is becoming increasingly common that such information is requested as part of the application review process.
Recently, investments involving private equity have been the target of additional scrutiny and personal intervention from the Treasurer and the imposition of further strict additional conditions and greater levels of tax disclosures.
Responding to these additional tax information requests may present challenges to investors. For instance, requests in respect of the tax treatment of distributions or interest payments to non-residents would require an understanding of the tax position of these entities and how such distributions or interest payments may be taxed. This information may not be readily available to the applicant, particularly if the transaction involves the use of collective investment entities such as private equity or infrastructure funds with multiple investors across different jurisdictions or where there are minority investors that are unrelated to the applicant themselves. Applicants may also find difficulty in responding to questions of how ultimate investors or shareholders may be financing the transaction.
Given the significant consequences of non-compliance with tax conditions (breaches being punishable by up to 10 years’ imprisonment and/or up to 15,000 penalty units for individuals and up to 150,000 penalty units for corporations), careful consideration of tax conditions and engagement with Treasury and the ATO is recommended in respect of all FIRB applications.
Investors with investments in infrastructure or private equity sponsored investments should expect extensive tax disclosures and conditions in their applications. Where it is expected that an investment would require approval under Australia’s foreign investment framework, preparation for the tax aspects of the process and whether they will be able to comply with tax conditions should be considered as early as possible.
As part of the Budget, a new requirement for foreign residents to notify the ATO of any disposal of shares and other membership interests exceeding A$20 million and where the vendor self-assesses that the sale is not taxable Australian property prior to the transaction being executed was announced.
The requirement is currently framed as a notification (not an approval), though the timing of the notification suggests that the ATO intends to use the notification to:
It is intended that this measure will apply to CGT events on or after 1 July 2025, though no details have been released about how this measure will operate in practice. We expect that further details will be provided as part of public consultation.
Most Australian States and Territories apply surcharge rates of stamp duty of up to 8% for foreign persons who acquire residential property, as well as surcharge land tax rates of up to 4% for foreign person owners of residential property. Victoria and Queensland also apply surcharge land tax rates for foreign person owners of non-residential property.
On 21 February 2023, the revenue authority in NSW (Revenue NSW) announced that it had determined that surcharge purchaser duty rates and surcharge land tax rates were inconsistent with tax treaties entered into by Australia with New Zealand, Finland, Germany and South Africa, meaning that citizens of those countries would not have to pay the foreign owner surcharges. Following this announcement, the Federal Government passed a new law, which broadly states that the laws imposing the surcharges prevail to the extent of any inconsistency with the provisions of Australia’s double tax treaties. The new law took effect on 8 April 2024 and caused Revenue NSW to retract its statement of 21 February 2023.
As part of its Budget, the Federal Government announced a plan to encourage and facilitate investment in certain priority industries that it sees will be important in the transition to net zero.
One of the measures announced as part of this plan is the Temporary Hydrogen Production Tax Incentive. This is to be a time-limited and uncapped refundable tax offset for eligible Australian resident corporations. It will provide an incentive of A$2 per kilogram of renewable hydrogen produced for up to 10 years between 1 July 2027 and 30 June 2040 for projects that reach final investment decisions by 2030.
Another measure is the Critical Minerals Production Tax Incentive. This incentive will provide a refundable tax offset of 10% for the costs of processing 31 critical minerals that are currently listed in Australia. Again, the offset will be available for up to 10 years between 1 July 2027 and 30 June 2040.
These changes are not yet law and there is a long period before they are slated to begin on 1 July 2027, meaning that there is no immediate relief for taxpayers from these announcements.
Housing supply and affordability issues in Australia have continued to receive significant attention in recent years and a number of Federal and State/Territory tax measures have been implemented or are proposed to be implemented to encourage investment in the “build-to-rent” sector.
In the previous year’s Budget, the Federal Government announced that it would “encourage investment and construction in the build-to-rent sector” by enacting or amending laws to give tax concessions to build-to-rent projects.
The Treasury Laws Amendment (Responsible Buy Now Pay Later and Other Measures) Bill 2024 was introduced into Parliament on 5 June 2024 confirming the tax concessions, being:
These proposed measures are to apply to new build-to-rent projects where construction commenced after 7:30pm (AEST) on 9 May 2023.
The draft legislation contains a number of requirements that must be satisfied to be eligible for these concessions, including requirements in respect of the number of dwellings in a building, the lease terms, the character of the dwellings, whether there is an “affordable housing” component and ownership requirements.
The draft legislation also introduced a proposed “BTR development misuse tax”, which would be triggered if a build-to-rent development ceases to meet certain requirements within the 15-year “BTR compliance period”. This tax will have the effect of neutralising tax benefits claimed once a build-to-rent development ceases to be compliant.
At a State level, there are various tax concessions (in respect of transfer duty and land tax) that may be available to build-to-rent developments. Exemptions from surcharge stamp duty and surcharge land tax for foreign investors may also be available.
However, the requirements for the tax concessions under the various State tax schemes do not uniformly align with the requirements under the Federal tax legislation. Given the significant potential costs that may be attributable to State duty and land taxes, investors must carefully assess the uncommon requirements to determine whether both Federal and State tax concessions will be available, and how they may affect an investor’s ability to exit the investment in the future.
The 2023–24 year saw changes implemented to NSW’s duty legislation with the effect of significantly expanding the NSW duty base, including:
These changes took effect from 1 February 2024. These changes have the effect of more closely aligning the NSW duty landscape with that of Victoria.
Small and medium business enterprises (SMEs) with an aggregated turnover of less than A$50 million are eligible for the Technology Investment Boost to claim a deduction for 20% of expenditure on digital operations incurred between 7:30pm (AEDT) 29 March 2022 and 30 June 2023.
SMEs can also claim a deduction for 20% of expenditure incurred for upskilling employees under the Skills and Training Boost, provided it was incurred between 7:30pm (AEDT) 29 March 2022 and 30 June 2024.
As part of the Budget, the Federal Government announced the extension of the A$20,000 instant asset write-off measure (which applies to SMEs with an aggregated turnover of less than A$10 million) until 30 June 2025. Further SME concessions announced in the 2023–24 Budget include:
The Federal Government also announced its intention to give the Commissioner discretion to not use a small business taxpayer’s refund to offset old tax debts, where the Commissioner had put that old tax debt on hold prior to 1 January 2017.
The ATO’s theme of ensuring that all taxpayers, be it large multinationals or domestic entities, pay their “fair share of tax” continues. The Government is very active in ensuring that this theme continues, as illustrated by the numerous measures discussed above. Many of those measures will become law imminently and we anticipate that Australia will continue to adopt and enact further tax law changes in the near and distant future in pursuit of this goal.
Acknowledgments
The authors wish to thank Lian Park, Georgia Whiteside, Lachlan Smithers and Gina Iskander, Senior Associates, for their contribution to this work.
This chapter has been written by a member of GLI’s international panel of experts, who has been exclusively appointed for this task as a leading professional in their field by Global Legal Group, GLI’s publisher. GLI’s in-house editorial team carefully reviews and edits each chapter, updated annually, and audits each one for originality, relevance and style, including anti-plagiarism and AI-detection tools.