Tag Archives: anti-avoidance

Part IVA – is a discretionary trust owned bucket company a sitting duck?

ducks

The Full Federal Court in Commissioner of Taxation v Guardian AIT Pty Ltd ATF Australian Investment Trust [2023] FCAFC 3 has dismissed the Commissioner’s appeal against decisions at [2021] FCA 1619 of the primary judge, Logan. J, not to impose the reimbursement agreement assessments on the trustee of the AIT under section 100A of the Income Tax Assessment Act (ITAA) 1936.

But the Full Federal Court has unanimously taken a radically different construction of the facts in the case to Logan J. to find that Part IVA of the ITAA 1936 was correctly applied to the Guardian AIT facts to support the Commissioner’s Part IVA determination, run as an alternative to section 100A, made in respect of the 2013 income year.

Reimbursement agreements – a blunt tool?

On this blog we have queried whether the section 100A reimbursement agreement regime is a tool useful to the Commissioner that gives the Commissioner scope to attack trust distributions that are no part of a trust stripping arrangement involving parties external to the trust: 100A trust reimbursement agreement not the tool to fix the bucket company dividend washing machine https://wp.me/p6T4vg-pM . We have also blogged about bucket companies lately, see: Can a family discretionary trust distribute income to its corporate trustee? https://wp.me/p6T4vg-rH

Without going into the detail in this blog post, the Full Federal Court in Guardian AIT has rather confirmed our thoughts about the utility of section 100A. We don’t see that the decision vindicates or gives legal support or backing to the Commissioner’s products and section 100A-based approaches in Taxation Ruling TR 2022/4 and Practical Compliance Guideline PCG 2022/2. Oddly the Commissioner finalised TR 2022/4 and PCG 2022/2 before Guardian AIT ran its course.

In the meantime there is another section 100A case on foot: BBlood Enterprises Pty Ltd v Commissioner of Taxation [2022] FCA 1112, which is also on appeal to the Full Federal Court and there is also the prospect of appeal in Guardian AIT to the High Court.

Part IVA sharpened up?

But Part IVA is a different matter. The Full Federal Court in Guardian AIT has warned how susceptible certain types of discretionary trust strategies, particularly discretionary trust strategies involving trust distributions to bucket company beneficiaries, may be to Part IVA.

This leads me to the key point of difference on the facts in the case between the Full Federal Court and Logan J. mentioned at the outset. Logan J. accepted Mr Springer’s contention that his company, AIT Corporate Services Pty Ltd (AITCS), was set up to accumulate assets for asset protection. Although the Full Federal Court accepted this as a tenable explanation in the 2012 income year, despite AITCS clearing out its asset, the distribution receipt from the AIT back to the AIT as a dividend; repeating the process to clear out the 2013 trust distribution back to the AIT in the 2013 year demonstrated AITCS wasn’t:

  • holding or protecting anything for asset protections reasons; or
  • more particularly planning to hold or protect assets accumulated or to be accumulated in the company.

AITCS was plainly being used as a bucket company to receive a trust distribution in the 2013 income year which allowed AITCS to distribute a franked dividend back to the AIT which could then be distributed tax advantageously by the AIT to Mr Springer, a non-resident.

The apparent counterfactual

The Full Federal Court had no difficulty accepting the Commissioner’s Part IVA counterfactual contended in the appeal. That counterfactual was that the AIT would have distributed 2013 year AIT income to Mr Springer directly which “might reasonably be expected to have been included” in 2013 income taxable to the trustee under Division 6 of Part III of the ITAA 1936. That distribution could have been made to Mr Springer without the circularity of the “washing machine” distribution going to AITCS, then back to the AIT as franked dividend and then, finally, going to Mr Springer as NANE income being a form of income not taxable to the trustee nor to Mr Springer under Division 6.

Circularity and the form of the scheme

The Full Federal Court noted the circularity of the scheme which the Commissioner could and did take into account under paragraph 177D(2)(b) of Part IVA in considering the form of the scheme.

Commercial rationale or explanation of the scheme?

The difficulty under the Full Federal Court Part IVA analysis for the AIT was that the only difference in effect between the scheme and the counterfactual was that, under the scheme, the income distribution to the non-resident beneficiary Mr Springer was tax free NANE income. Under the counterfactual though, tax on the trustee of AIT at the highest marginal rate under Division 6 might reasonably have been expected. The same commercial outcome viz. income in Mr Springer’s hands within eight months of the end of the 2013 year of income confirmed that the only difference in what happened between the scheme, and reasonably expected to happen under the counterfactual, was the tax effect: a tax benefit the Commissioner could posit under Part IVA.

section 177CB – tax gives no explanation

The Full Federal Court noted that, following amendment to Part IVA which introduced section 177CB and sub-section 177CB(4) in particular, the tax impact of the scheme viz. the “operation of the Act”, or, more pointedly, the lower tax cost choice, is now expressly excluded as something that might reasonably be expected viz. the tax impact is now precluded by legislation from being a basis for a Part IVA counterfactual. Shortly stated that means the better tax outcome can no longer be a reasonable justification for choosing to implement a scheme caught under Part IVA.

Observations

Once the façade of an asset protection asset accumulating role for AITCS was identified by the Full Federal Court then AITCS was left exposed as a bucket company with a role in a tax scheme to re-purpose a trust distribution as a franked dividend to the tax advantage of Mr Springer in the 2013 year. In the context of potential Part IVA counterfactuals the Commissioner can raise, the AITCS bucket company can be viewed as unfortunately placed as both:

  • AITCS was a beneficiary of the AIT viz. the bucket company characteristic; and
  • shares in AITCS were owned by the AIT which facilitated the payment of trust income distributed to AITCS as dividends back to the trust;

enabling the loop or circularity which allowed the AIT to route income via AITCS as a franked dividend back to itself. But a clear or obvious alternative for the trustee of AIT would have been to distribute trust income to a different prominent beneficiary with a history of receiving distributions from the trust, such as Mr Springer. Distribution to Mr Springer was an even more obvious and irrefutable counterfactual when the distribution reflecting the income ultimately ended up with that beneficiary after going around in the circle.

Part IVA risks beyond non-residents?

Why would Part IVA in these situations be confined to where the ultimate beneficiary is a non-resident even though the AITCS scheme was particularly advantageous to AIT given high rates that apply on Division 6 taxation of non-residents? There can also a tax advantage and potential tax benefit too where a resident beneficiary receives discretionary trust income in the form of a franked dividend instead or as ordinary trust income. There is no reason why Part IVA couldn’t be similarly applied to a comparable circular scheme to use a bucket company loop to transform ordinary trust income into more lightly taxed franked dividend income.

Are bucket companies sitting ducks for Part IVA?

As a matter of policy the Commissioner has not used Part IVA to challenge direct distributions by family discretionary trusts to bucket companies to my knowledge. Guardian AIT shows that Part IVA can give the Commissioner a basis or tool to attack distributions to bucket companies which can be shown to have no purpose or reason, objectively determined, other than to save tax.

Where  discretionary trust ownership of shares in the bucket company facilitates opportunity for franking or other tax saving by going around in a circle, the trustee may be a sitting duck for the Commissioner’s Part IVA counterfactual positing what the trustee may have done had the distribution been made to the intended beneficiary to receive trust income the first time around.

CGT small business concessions and exotic share classes

ExoticCactus

Exotic share classes, such as redeemable preference shares and dividend only (dividend access [DA]), shares are a longstanding concern for a private company seeking to access the small business CGT concessions (the Concessions) in Division 152 of the Income Tax Assessment Act (ITAA) 1997. Exotic share classes can derail qualification as a significant individual and thence as a CGT concession stakeholder for all shareholders of the company. The consequences are that a private company, otherwise eligible for the Concessions:

  • will not be eligible in some cases; and
  • in more or all cases, where the company is eligible and can apply the Concessions, shareholders of the Company with an insufficient small business participation percentage (SBPP) won’t be able to individually participate in the Concessions along with the company.

Why does this happen?

It’s due to the structure of section 152-70 of the ITAA 1997 which, in the case of a company, determines SBPP based on the “the smaller or smallest”:

… percentage that the entity has because of holding the legal and equitable interests in shares in the company:

(a) the percentage of the voting power in the company; or

(b) the percentage of any dividend that the company may pay; or

(c) the percentage of any distribution of capital that the company may make;

or, if they are different, the smaller or smallest.

Illustration

So a DA share may entitle a shareholder to dividends but not to voting rights or distributions of capital. Dividends of a company with DA shares can be declared on shares in the DA class only so other shareholders of the company, entitled to:

  • voting rights and distributions of capital e.g. ordinary shareholders; but
  • not to dividends as they are diverted to the DA share class;

leaves all shareholders with a zero SBPP. The SBPP is driven by the smallest of (a), (b) and (c) above and, in the case of the example ordinary shareholders,  it is (b) that is zero. Zero is less than the 20% SBPP needed for a shareholder to be a significant individual: section 152-55.

What to do with dormant DA shares?

But what if a company on the verge of making a capital gain to which the Concessions can apply:

  • has a DA shareholder who could receive dividends declared to the DA class; but
  • desists from paying dividends on the DA class and all dividends are instead payable to ordinary shareholders?

Broadly this was what happened in Commissioner of Taxation v Devuba Pty Ltd [2015] FCAFC 168. I have no first-hand knowledge of the background to the case but I imagine Devuba’s experienced tax lawyer, Gregory Ganz, was aware of and advised on section 152-70 in the years in the lead up to the profitable sale of shares in another company, Primacy Underwriting Agency Pty Ltd, for $4,381,645 by Devuba Pty. Ltd. on 19 May 2010.

The DA share dilemma

I can see he and Devuba faced a dilemma. If, by 19 May 2010:

  • the DA shareholder still held the DA share then section 152-70 could apply to reduce the ordinary shareholders’ SBPPs to zero because Devuba “may pay” dividends on the DA class, This is the view that the Commissioner of Taxation was to take and contest in the case;
  • Devuba had redeemed or cancelled the DA share so that dividends would no longer be paid on DA shares there would have been a CGT event, probably CGT event C2, on which the DA shareholder would be taxed with the value of the capital proceeds, based on the market value substitution rule, being attended by valuation uncertainty; or
  • Devuba altered the rights of the DA shareholder so that dividends would no longer be paid on DA shares then CGT impacts and comparable valuation uncertainty would have arisen under the value shifting rules in Part 3-95 of the ITAA 1997 which had commenced to operate from 2002.

In the event Devuba went to the share sale on 19 May 2010 with the DA shareholder still holding the DA share. However, on 1 September 2008, the directors had passed a resolution in the accordance with Article 83 of the Memorandum and Articles of Association of Devuba that dividends were not to be paid on the DA share class until the directors passed a resolution to do so. Effectively this was a somewhat soft touch moratorium on DA class dividends probably insufficient or thought insufficient to trigger an alteration in rights which would have attracted value shifting CGT consequences.

“May pay”

Devuba figured dividends Devuba “may pay” on the DA class became zero as a matter of fact and likelihood because of this resolution. On the other hand the Commissioner took the view that Devuba could nonetheless legally pay dividends to the DA shareholder and so the ordinary shareholders had a SBPP of zero due to (b).

The Federal Court and the Full Federal Court agreed with Devuba. It was found that Devuba was unable to pay dividends immediately before 19 May 2010 to the DA shareholder with the moratorium in place.  The courts found that the moratorium was valid and effective under the Memorandum and Articles of Association such that dividends that Devuba “may pay” on the DA class were zero. It followed that the percentage of dividends Devuba “may pay” to ordinary shareholders gave the ordinary shareholders sufficient SBPP to meet the relevant SBPP thresholds for the Concessions relevant in the case.

Exotic share class problem with the Concessions persists

This case shows the concern mentioned at the outset persists: Issued DA shares can still drive SBPP to zero and deprive ordinary shareholders of a company of the Concessions even where dividends are not paid to the DA class. Only with nuanced planning, an understanding of the constitution of a company and its interaction with the terms of the relevant exotic share class can help overcome a SBPP problem caused by an exotic share class with SBPP and the Concessions.

Even further income tax trouble

And income tax problems with exotic share classes like DA shares don’t end there. DA shares used for tax minimisation are considered aggressive tax planning and are the subject of the Commissioner’s:

Taxpayer Alert TA 2012/4 Accessing private company profits through a dividend access share arrangement attempting to circumvent taxation laws

which contains a lengthy list of bases on which the Commissioner can and will tax distributions on DA shares including treatment of DA share class distributions as dividend stripping under Part IVA of the ITAA 1936. Exotic share class can also have unexpected consequences under the debt equity rules in Division 974 of the ITAA 1997.

Reflection

Although the outcome in Devuba was technical and based on its particular facts, it marks a divergent, realistic and perhaps reassuring approach to the enquiry into dividends a company may pay. That stands in comparison to the unrealistic and dogmatic approach taken particularly by Revenue NSW and under the Duties Act (NSW) 1997 (DA NSW) to the questions of:

  • whether a trustee or trustees may become beneficiaries of a trust for the purposes of obtaining concessional duty on a change of trustee of a trust under sub-section 54(3) of the DA NSW; and
  • whether foreign person or persons may become a beneficiaries of a trust for the purposes of foreign person stamp duty and land tax surcharges under section 104J of the DA NSW;

obliging substantial, sometimes legally unachievable and largely unnecessary trust deed amendments before it can be accepted that such persons will never take a percentage of a trust as a beneficiary of the trust oblivious to perceivable facts, likelihoods and evidence that such a beneficiary would ever take.

Draft ATO reimbursement agreement suite out in the wake of Guardian AIT

In my blog post 100A trust reimbursement agreement not the tool to fix the bucket company dividend washing machine last month I looked at reimbursement agreements following Guardian AIT Pty Ltd ATF Australian Investment Trust v. Commissioner of Taxation [2021] FCA 1619 (Guardian AIT).

The Commissioner acts

In the meantime the Commissioner has appealed Logan J.’s decision in Guardian AIT to the Full Federal Court. The Commissioner has also released a suite of “draft products” which set out the compliance approach of the Commissioner relating to reimbursement agreements under section 100A of the Income Tax Assessment Act (ITAA) 1936:

  • Draft Taxation Ruling TR 2022/D1 Income tax: section 100A reimbursement agreements
  • Draft Practical Compliance Guideline PCG 2022/D1 Section 100A reimbursement agreements – ATO compliance approach
  • Draft Taxation Determination TD 2022/D1 Income tax: Division 7A: when will an unpaid present entitlement or amount held on sub-trust become the provision of ‘financial accommodation’?
  • Taxpayer Alert TA 2022/1 Trusts: parents benefitting from the trust entitlements of their children over 18 years of age 

Evolution of the draft products

The suite clearly evolves from a similar suite finalised nearly twelve years ago which included Taxation Ruling TR 2010/3 Income tax: Division 7A loans: trust entitlements and Practice Statement Law Administration PS LA 2010/4 Division 7A: trust entitlements which focused on unpaid present entitlements of private companies, deemed loans and sub trusts. The Commissioner now takes a tougher line, prospectively, on what is a financial accommodation and thus a deemed loan for the purposes of Division 7A of the ITAA 1936 in TD 2022/D1. A company will need to demand immediate payment when it becomes aware of and has an unpaid present entitlement (UPE) to income of a trust. There will still be a financial accommodation, despite arrangement to pay a commercial rate of interest, which will be enough to be deemed loan and potentially a deemed dividend. Section 109N of the ITAA 1936 complying loan terms are needed so that UPE will not trigger a deemed dividend under section 109D.

This does not appear to be a relevant matter in Full Federal Court appeal in Guardian AIT in relation to the the bucket company dividend washing machine (BCDWS) arrangement used in that case. Under that BCDWS a dividend was declared by the bucket company back to the Australian Investment Trust (AIT) in the window allowed for a private company debit loan before the income tax return for the bucket company was due. That declaration is a prompt if not immediate action to extinguish any financial accommodation by the bucket company to the AIT.

Staying red?

The dividend washing machine arrangement comes up as Red zone scenario 2 in paragraphs 33 to 36 of PCG 2022/D1 where red zone activity in PCG 2022/D1 is activity at high risk for ATO action with compliance resources. It is not expected that, even if the Commissioner is unsuccessful in the Full Federal Court case in Guardian AIT, the BCDWS will be reclassified out of the red zone and will become an acceptable tax practice.

Repercussions of Guardian AIT?

It remains to be seen whether section 100A risks addressed in the draft products will align with Guardian AIT following the Commissioner’s appeal. Will higher courts adopt Logan J.’s understanding of the facts which accepted the BCDWS as an ordinary family or commercial dealing?

Perhaps more problematic for the Commissioner will be to convince a higher court that there was a reimbursement agreement at all in Guardian AIT. Logan J.’s findings that there was no timely reimbursement agreement for the bucket company to pay dividends to the Australian Investment Trust, and no plausible counterfactual as to whom otherwise the trustee of the Australian Investment Trust would have distributed income of that trust had it not been distributed to the Australian Investment Trust, meant the Commissioner could not make out a reimbursement agreement to which section 100A could apply.

In running the appeal the Commissioner may run the risk that the Full Federal Court will establish authority that section 100A cannot readily apply where the impugned distributions to which the Commissioner seeks to apply section 100A is made to immediate family members such as Simon and Sam in Example 7 in paragraphs 85 to 92 of PCG 2022/D1.

Example 7 – amounts provided to the parent in respect of expenses incurred before the beneficiary turns 18 years of age

85. Brown Trust’s beneficiaries include the members of the Brown Family. Brown Co is the trustee of Brown Trust, and Bronwyn Brown is the sole shareholder and director of the trustee.

86. Bronwyn is the parent of three adult children; Sandra (aged 26), Simon (aged 21) and Sam (aged 19).

87. During the 2022-23 income year, Sandra is self-employed and has a taxable income of $90,000. Simon and Sam study full-time and derive no income during the income year. Bronwyn’s children live at home with her at all times throughout the income year.

88. During the 2022-23 income year, Brown Trust derives $240,000 in income (the trust’s net income is also $240,000). Throughout that year, Brown Co makes regular payments totalling $240,000 into Bronwyn’s bank account. Those payments are recorded as a ‘beneficiary loan’ in the accounts of Brown Trust. Bronwyn uses these amounts throughout the year to meet her personal living expenses and those of the household.

89. On 30 June 2023, Brown Co resolves to make Simon and Sam each presently entitled to $120,000 of the Brown Trust income.

90. Brown Co applies their entitlements against the beneficiary loan owed by Bronwyn. The entitlements of Simon and Sam are each recorded as having been fully paid in the accounts of Brown Trust. Bronwyn assists in the preparation of Simon and Sam’s tax returns and pays the tax liability arising in relation to their entitlements from her personal funds.

91. The entitlements of Simon and Sam are applied in this manner because they each purportedly have an outstanding debt owed to Bronwyn in respect of education expenses and their share of the Brown household expenses that Bronwyn paid before they each turned 18.

92. Diagram 10 of this Guideline illustrates the circumstances in this example.

Example 7 in PCG 2022/D1

Under sub-section 100(8) an agreement is carved out from being a reimbursement agreement unless there is what the Commissioner refers to as the tax reduction purpose.

Even though a distribution in that Example 7 to Bronwyn was a “lawful possibility” why “would have” distributions made to Simon and Sam (assuming the distributions were real and genuine) who are equally family beneficiaries with Bronwyn have been made to Bronwyn? Isn’t the true issue that the trust distributions to Simon and Sam are a sham and that Simon and Sam did not have a real entitlement and so are not presently entitled to the distributions in the first place?

The Commissioner appears to be reliant on the Full Federal Court agreeing with the construction of sub-section 100A(8) expressed in paragraphs 156 to 158 of Draft Taxation Ruling TR 2022/D1 Income tax: section 100A reimbursement agreements rather than the construction of that sub-section preferred by Logan J.

100A trust reimbursement agreement not the tool to fix the bucket company dividend washing machine

WashingMachine

This blog post is about tax avoidance. That is not apparent from the odd title of this blog which I should explain:

Bucket companies

A bucket company is a private company included as a beneficiary of a trust and is used to receive income of a trust. It is a popular discretionary trust strategy for a trust to distribute trust income to a bucket company as a beneficiary of the trust when, as at present, company income tax rates are lower than income tax rates:

  • for beneficiaries who are individuals typically on significant incomes (individual beneficiaries); and
  • the (can be even higher – highest marginal) rate generally paid when no beneficiary receives (technically: is distributed or becomes presently entitled to) the income of the trust;

(the Higher Rates).

Thus the “bucket” takes the overflow of trust income which the trustee or trust doesn’t wish:

  • to flow to high income individual beneficiaries; and
  • to be taxed at their higher rates.

Not considered tax avoidance

The Commissioner of Taxation (Commissioner) doesn’t view the simple use of a bucket company as a beneficiary of a trust as tax avoidance. That is the case even though less tax will be collected from a trust’s trustee and beneficiaries when the Higher Rates won’t be paid by the trustee and the beneficiaries of the trust when a BC beneficiary is used. There are measures in place: notably the deemed dividend anti-avoidance rules in Division 7A of Part III of the Income Tax Assessment Act (ITAA) 1936 (Div 7A), which generally give the Commissioner assurance that:

  • a private company is a no mere lowly taxed conduit or way for high income individual individuals to receive trust income; and so
  • value either within and distributed to a private company stay within the company or are otherwise treated as non-frankable shareholder/associate dividends they are deemed to receive and to be taxable on.

The washing machine

The bucket company dividend washing machine (BCDWS) though pushes the Commissioner’s tolerance for the bucket company tax strategy.

The BCDWS is like this:

  1. A family discretionary trust (FDT) makes a substantial distribution of trust income (Distribution 1) to a bucket company (BC) in Year 1.
  2. Distribution 1 is not paid and thus becomes an unpaid present entitlement owed to BC by FDT to be paid later.
  3. BC is taxable on Distribution 1 in Year 1 at the company rate which is lower than the Higher Rates.
  4. In Year 2, but in the window before the income tax return for BC is due, and thus before Div 7A treats Distribution 1 to BC to be a deemed dividend based on the analysis of when unpaid present entitlements, including unpaid present entitlements of companies in trust income, can be loans and deemed dividends in Taxation Ruling TR 2010/3 Income tax: Division 7A loans: trust entitlements; the bucket company declares and pays a dividend to cover Distribution 1.
  5. BC has franking credits to frank the dividend from the payment of tax as a beneficiary on Distribution 1.
  6. The sole shareholder of BC entitled to the dividends is the (trustee of) FDT which has been set up as the owner of the shares in BC that can participate in these dividends.
  7. No actual payment is required as Distribution 1 has gone around the washing machine and has come back to FDT in Year 2 as dividends fully franked by BC.
  8. So in Year 2 the trustee of FDT distributes Distribution 2 of the same amount as Distribution 1 to BC again. It is again unpaid until early in Year 3. The distribution is fully franked which is how the dividends were received from BC so there is no further tax for BC to pay.
  9. The arrangement can be repeated on and on.

By using a concession in Div 7A, the BCDWS in effect enables BC to access a lower company income tax rate for an amount which is not actually paid over or intended to be paid over to a beneficiary but circulates back to the trustee.

Income tax rate integrity problem

So it’s like the trustee is accumulating the income and never having to pay it to a beneficiary but paying less tax as if the income had been paid to a company.

Understandably the Commissioner is concerned with the integrity of income tax rates, and the particularly the integrity of the Higher Rates including the highest marginal rate applicable where no beneficiary is presently entitled to income under section 99A of the ITAA 1936. The Commissioner would like to see that the BCDWS will have the same rate outcome. It does if a BCDWS is a trust reimbursement agreement: a share of trust income arising from a section 100A reimbursement agreement is deemed to be income to which no beneficiary is presently entitled: sub-section 100A(1).

So it is that, at the ATO website, https://www.ato.gov.au/General/Trusts/In-detail/Distributions/Trust-taxation—reimbursement-agreement/ where, at example 5, the Commissioner observes that the trust reimbursement agreement provisions in section 100A of the ITAA 1936 apply to a BCDWS arrangement.

Guardian AIT Pty Ltd ATF Australian Investment Trust v Commissioner of Taxation

The Commissioner’s observation in example 5 is put into doubt by the December 2021 Federal Court case Guardian AIT Pty Ltd ATF Australian Investment Trust v. Commissioner of Taxation [2021] FCA 1619. In that case the Commissioner was unsuccessful assessing a BCDWS using anti-avoidance tax laws including section 100A. The taxpayer’s appeal to the Federal Court concerned the Commissioner’s assessments applying the anti-avoidance provisions in section 100A and, alternatively, based on the general anti-avoidance provisions in Part IVA of the ITAA 1936.

Logan J. found that there was no reimbursement agreement and that Part IVA didn’t apply.

The Commissioner had at least these significant difficulties in making out that the BCDWS in the case was a reimbursement agreement:

  1. firstly, that there was any agreement to which sub-section 100A(7) and (8) could apply, and particularly establishing a counterfactual as to whether Mr. Springer, who controlled Guardian AIT Pty Ltd, would have been liable to pay income tax had the “agreement” not been implemented;
  2. secondly, that there was provision of “payment of money or the transfer of property to, or the provision of services or other benefits for, a person or persons other than the beneficiary …” under that agreement: sub-section 100A(7); and
  3. thirdly, that the agreement was not an ordinary family or commercial dealing: sub-section 100A(13).
·        agreement

Mr. Springer was wealthy and conducted a well prepared case before the Federal Court in which the taxpayer was able to establish that the BC, Guardian AIT Pty Ltd, had not been set up with the intent, understanding or expectation that the BC would pay dividends back to the Australian Investment Trust (the FDT). That is what eventually transpired though, and a BCDWS, largely as described above and in the Commissioner’s example 5 happened.

There must be an agreement first

Logan J. accepted that even though it was legally possible for the BC to pay the dividends to the FDT there was no evidence of any timely agreement or plan (my words) to do so. To make out a section 100A reimbursement agreement the Commissioner had to make out that there was “agreement” (though widely defined) between the FDT and its beneficiary/ies before BC started paying dividends to the FDT to make the income tax saving.

Counterfactual not accepted

Logan J. found the Commissioner’s counterfactual under the section 100A(8) “would have been” hypothetical: that Mr. Springer personally would have been liable to pay income tax, that is Mr. Springer would presumably have to have been the beneficiary presently entitled to the income distributed to the BC rather than the BC, had it not been for the reimbursement agreement, could not be reconciled with the evidence in the case.

·        payment, transfer etc.

Logan J. did not accept that there has provision for a payment , transfer etc. to another beneficiary…. The BC was a related entity of Mr. Springer that was a beneficiary of the FDT and a part of the family structure in its own right (that incidentally happened to be on a lower tax rate as an income beneficiary).

Unlike with a unrelated entity that takes, say, a payment to be made a beneficiary of trust income in a trust stripping, which is the use of trusts abuse to which section 100A is directed; the BC in this case can be seen as a beneficiary related to and having no reason for such arm’s length like dealing with Mr. Springer or other members of his family.

·        ordinary family or commercial dealing

Section 100A was introduced to combat trust stripping typically involving unrelated parties (see Federal Commissioner of Taxation v Prestige Motors Pty Ltd (1998) 82 FCR 195) and “specially introduced beneficiaries having a fiscally advantageous status” particularly. Logan J. did not accept that this characterisation applied to the BC, Guardian AIT Pty Ltd. From the evidence Logan J. found that the implementation and use of Guardian AIT Pty Ltd as a “clean” (for instance, no carry forward losses or other utilisable positive tax attributes) company beneficiary of the FDT, Australian Investment Trust, was an ordinary family dealing.

Observations

Guardian AIT confirms that a reimbursement agreement contains a number of technical elements that the Commissioner can be hard pressed to establish where a taxpayer produces facts contrary to the Commissioner’s position on them. These elements can make section 100A, as a tool in the anti-tax avoidance armoury of the Commissioner, ill-suited to enforce the integrity of the Higher Rates applicable to trust income and the rate applicable under section 99A of the ITAA 1936 where there is no beneficiary presently entitled to income in particular. That is not to say that the Commissioner should not endeavour to enforce that integrity.

Based on authority referred to in Guardian AIT Logan J. was unwilling to accept that the reimbursement agreement rules in section 100A, directed as they are to the contrived introduction of specially introduced beneficiaries with a fiscally advantageous status, had application to a clean company introduced within Mr. Springer’s family structure despite the overtly unplanned tax arbitrage Mr. Springer could achieve due to the lower company income tax rate.

There is the prospect that the Commissioner will appeal to the Full Federal Court. The government could better protect the integrity of the trust tax rates with specific amendment so that circulating BCDWS distributions, which do or must have some aspect of artificiality or contrivance by virtue or their circularity or non-distribution, attracted the highest marginal rate of tax without the Commissioner having to contest assessments based on section 100A and Part IVA attack or sham characterisation which are more costly, fraught and complicated for the Commissioner to prosecute.

Australian non-fixed trust liable for CGT on non-TAP gains given to a foreign resident: Peter Greensill Family Co Pty Ltd

BigBen

A mirror of the general principle of source and residence taxation broadly setting the parameters of international taxation, and reflected in Australia’s income tax law, is that income of a foreign resident not from sources in the state is not taxable in the state (in this post called the Mirror Principle). In Australia:

  • interests in real property in Australia and related interests; and
  • interests in assets used in business in permanent establishments in Australia:

are designated “Taxable Australian Property” (TAP) (see Division 855 of the Income Tax Assessment Act (ITAA) 1997). TAP is used in Australian income tax law to apply the Mirror Principle.

Foreign resident capital gains from non-TAP disregarded

Property which is not TAP, that is, property not taken to be connected to Australia for income tax purposes in the hands of foreign residents includes shares and securities as opposed to property interests in or related to Australian land or of permanent establishments carrying on enterprises in Australia which are TAP.

Capital gains made by foreign residents from non-TAP assets are disregarded for tax purposes: section 855-10.

Trouble pinpointing trusts as foreign or not

Trusts are elusive and create enormous difficulties in the international tax system see Trusts – Weapons of Mass Injustice. Trusts can detach beneficiaries who benefit from property who may be in one state from:

  • the trustee of the trust, in whose name the property is held, who may be in another state; and
  • the activities of trust which may be in yet another state.

Apt taxation of those activities in line with Mirror Principle thus poses a significant challenge to governments. States are justified imposing laws to counter offshoring with trusts to ensure the integrity of their tax systems.

Some states don’t recognise trusts.

In Australia trusts are mainstream. Some types of trusts are considered tax benign and conducive to legitimate business, investment and prudential activity. Fixed trusts are often treated transparently for Australian income tax purposes so that a fixed trust interest holder is:

  • taxed similarly to a regular taxpayer or investor; and
  • no worse off, tax wise, than a taxpayer or investor who owns the property outright rather than by way of a trust beneficial interest.

So, consistent with the Mirror Principle that a foreign resident owner of non-TAP who makes a gain on the non-TAP shouldn’t be taxable on the gain, a foreign resident beneficiary (FRB) of a fixed trust can disregard a capital gain made in relation to their interest in a fixed trust: section 855-40.

Peter Greensill Family Co Pty Ltd (trustee) v Commissioner of Taxation

In the Federal Court case Peter Greensill Family Co Pty Ltd (trustee) v Commissioner of Taxation [2020] FCA 559 this week the issue arose whether an Australian resident family discretionary trust – a non-fixed trust, was entitled to rely on section 855-10 and the Mirror Principle to disregard capital gains distributed to a FRB, a beneficiary based in London, of the trust from realisation by the trust of shares in a private company, GCPL, which were non-TAP of the trust.

Detachment of capital gains from the workings of trust CGT tax rules

The capital gains of a trustee are distant from the capital gains of a beneficiary under the ITAA 1936 and the ITAA 1997. Transparent treatment or look through to the capital gains of the trustee as capital gains of the beneficiary/ies became even more remote following changes to Sub-division 115-C of the ITAA 1997 including the introduction of Division 6E of Part III of the ITAA 1936.

These changes brought in distinct treatment of capital gains and franked distributions of a trust from other trust income following the High Court decision in Commissioner of Taxation v Bamford [2010] HCA 10 and the clarification of taxation of trust income in that case.

Legislation unsupportive of transparent treatment

In Greensill Thawley J. analysed the provisions in Sub-division 115-C and Division 6E to deconstruct the applicant’s case to disregard capital gains using Division 855. 

Section 855-40 specifically allows a FRB of a fixed trust to disregard non-TAP capital gains. The absence of an equivalent exemption for FRBs of non-fixed trusts is telling unless section 855-40 is otiose or represents an abundance of caution. Thawley J. did not follow that line. As the applicant in Greensill could not disregard the capital gains using section 855-40 in the case of non-fixed trust, or section 855-10, the capital gains were taxable in Australia.

Unless there is an appeal to the Full Federal Court the Commissioner can finalise his draft taxation determination TD 2019/D6 Income tax: does Subdivision 855-A (or subsection 768-915(1)) of the Income Tax Assessment Act 1997 disregard a capital gain that a foreign resident (or temporary resident) beneficiary of a resident non-fixed trust makes because of subsection 115-215(3)? as the Federal Court has accepted the view in it.

Closely held trusts, “family trusts” and circular trust distributions – a tax net nuanced again for the compliance burden

trusts guardrail

In Australia the income taxation of trusts is based on the trust being a conduit with look-through to beneficiaries of the trust who are presently entitled to the income of the trust. In the standard case of an adult resident beneficiary of a trust, the beneficiary is taxed on trust income and the trust is broadly treated as a transparent entity and isn’t taxed.

Even where a beneficiary is:

  • not an adult; or
  • not a tax resident;

the trustee of the trust pays tax though ostensibly on behalf of the beneficiary entitled to trust income at the rate applicable to the beneficiary and the beneficiary is entitled to a credit for tax paid on that income should the beneficiary file his, her or its own tax return.

Tax capture when no beneficiary entitled to the income

Look-through taxation of income doesn’t work when there is no beneficiary presently entitled to income of the trust to look through to. Under the Australian system, in these cases, the trustee of a trust pays tax at the highest marginal rate on income plus applicable levies including medicare levy. That is where no beneficiary is presently entitled to the income of a trust under section 99A of the Income Tax Assessment Act 1936.

The trustee beneficiary complication

Trusts can be beneficiaries of other trusts. These beneficiaries are “trustee beneficiaries” of a trust.

Example

  • The trustee of trust B is a beneficiary and so is a trustee beneficiary of trust A.
  • C, a beneficiary of trust B, takes (is presently entitled to) a share of the income of trust A.
  • C may be an individual or a company, viz. an ultimate beneficiary, or may be a further trust – a further trustee beneficiary.

It is then necessary to trace trust income of trust A through trustee beneficiaries to find if there is an ultimate individual or company beneficiary entitled to that income. There may be no ultimate beneficiary entitled to income and the case of a “circular” trust distribution is a case in point.

The circular trust distribution by trusts

A definitive example of a circular trust distribution of income is where:

  • trust X distributes income of trust X to trust Y; and
  • trust Y distributes its income (back) to trust X.

There is thus no ultimate individual or company beneficiary. The income is in a state of flux.  Nonetheless it is clear no beneficiary is presently entitled to the income and the highest marginal rate and applicable levies imposed under section 99A should be applicable to a circular trust distribution of income under the regime so far described.

That is a fair point in principle but a circular trust distribution, or any distribution to a trustee beneficiary that isn’t on-distributed to an ultimate beneficiary, is not necessarily readily traceable and identifiable as income to which no beneficiary is entitled. That is especially so where a labyrinthine structure of numerous trusts is used to conceal who is entitled to trust income and that there is no ultimate beneficiary who is not a trustee beneficiary entitled to trust income.

The legislative countermeasures

Countermeasures in the below legislation apply to support the integrity of flow through taxation of trusts. These countermeasures were introduced in Division 6D of Part III of the Income Tax Assessment Act 1936 which has lead to these new taxes:

  • firstly, the ultimate beneficiary non-disclosure tax when introduced with the A New Tax System (Closely Held Trusts) Act 1999 (see below); and
  • currently the trustee beneficiary non-disclosure tax as introduced to reform the ultimate beneficiary non-disclosure tax under the Taxation (Trustee Beneficiary Non-disclosure Tax) Act (No. 1) 2007 and the Taxation (Trustee Beneficiary Non-disclosure Tax) Act (No. 2) 2007.

These taxes were or are in substance proxies for tax on the trustee under section 99A for presumed lack of present entitlement of an ultimate beneficiary to ensure that income of a trust does not escape income tax either:

  • for want of an ultimate beneficiary entitled to the income; or
  • because of the opaque lack of an ultimate beneficiary where a trustee beneficiary may seem to be an ultimate beneficiary in the tax return of the trust.

Like the rate that applies under section 99A the rate of trustee beneficiary non-disclosure tax is the highest marginal rate plus applicable levies including the medicare levy.

The countermeasures also include a concept of “trustee” group which expands liability for trustee beneficiary non-disclosure tax to corporate directors of trustees of closely held trusts personally: an impost beyond the section 99A impost for falling under the purview of these anti-avoidance provisions.

A New Tax System (Closely Held Trusts) Act 1999

The first legislation to grapple with the tracing problem was in the A New Tax System (Closely Held Trusts) Act 1999 which introduced a wide and indiscriminate ultimate beneficiary statement reporting obligation on all closely held trusts.

Closely held trusts

A trust is a closely held trust if it:

  • is a discretionary trust, or
  • has up to 20 individuals who, between them, directly or indirectly, and for their own benefit, have fixed entitlements to a 75% or more share of the income or a 75% or more share of the capital of the trust;

where the trust is not an excluded trust. Examples of excluded trusts are complying superannuation funds and, for their first five years, deceased estates.

Reset of the closely held trust compliance burden

In response to sustained complaints from many trustees of trusts which did not distribute to trustee beneficiaries and their advisers, the federal government came to amend the regime in 2007 so that only trustees of closely held trusts which distribute income to:

  • trustee beneficiaries;
  • where the distribution includes an “untaxed part”;

have reporting obligations to file a trustee beneficiary (TB) statement. TB statements need to be filed with a tax return and, in the case of resident trustee beneficiaries, need to disclose the following about the trustee beneficiary:

  • name,
  • tax file number,
  • the untaxed part of their share of trust income; and
  • their share of tax preferred amounts;

and to withhold trustee beneficiary non-disclosure tax and to pay it to the Commissioner of Taxation where the relevant trustee beneficiary fails to provide the information for the TB statement when it is sought by the (distributor) closely held trust.

This more nuanced or targeted solution imposes a less onerous compliance burden on closely held trusts than the 1999 measures did.

Further, in accord with policy to treat “family trusts” viz. trusts that have

  • a valid family trust election; or
  • a valid interposed entity election;

in force or that otherwise forms part of a “family group” less onerously, family trusts were excluded trusts to which the closely held trusts regime did not apply following the 2007 reform.

2018-19 Budget changes to closely held trusts

Following an announcement in the 2018-19 Federal Budget, the closely held trust arrangements have been further tweaked by the Treasury Laws Amendment (2019 Tax Integrity and Other Measures No. 1) Act 2019. Under these changes it is still the case that family trusts still do not have to comply with the TB statement reporting requirements however family trusts are no longer excluded trusts.

That means that a family trust that is a closely held trust (which will often be the case) must now comply with the closely held trust obligations but a family trust remains relieved from the obligation to file TB statements and pay trustee beneficiary non-disclosure tax on omission to file a TB statement. Despite that a family trust is now liable for trustee beneficiary non-disclosure tax on circular trust distributions under section 102UM of the Income Tax Assessment Act 1936 but not on distributions received from other trusts (which are not circular and to which section 102UM does not apply).

How will compliance with the changes work?

It is perhaps unusual that the changed closely held trusts regime relieves a family trust, no longer an excluded trust and that distributes income to a trustee beneficiary, from filing a TB statement. The Commissioner of Taxation will have no TB statement to aid detection of a taxable circular distribution back to the family trust. Further, in the case of family trusts, the Commissioner won’t obtain TB statement level information about distributions by family trusts to trustee beneficiaries that are not circular or the opportunity to impose the trustee beneficiary non-disclosure tax on those distributions as a matter of course on the omission to file a TB statement.

Nevertheless the Commissioner of Taxation will have trustee beneficiary contact details and perhaps a tax file number, or will be alerted by the absence of a tax file number; from the tax return of a closely held trust family trust. The Commissioner can trace a distribution and ascertain when a circular trust distribution by a family trust occurs by investigative activity. Further, risk of family trust distributions tax liability under Schedule 2F of the Income Tax Assessment Act 1936 makes it less likely that a family trust will make a distribution liable to that tax, particularly a distribution of a tax preferred amount, to a trustee beneficiary that is:

  • outside of the family group; and
  • where that trustee beneficiary’s tax file number is not known by the trustee of the trust and reported in the trust tax return.

Income from private company investments – the tax scourge of SMSFs

increase

A self managed superannuation fund (SMSF) is generally a low tax entity, particularly when in pension phase where a nil rate can apply and a low 15% rate can apply when not. Still the taxable income of a complying superannuation fund (SF) can be split into a non-arm’s length component and a low tax component under section 295-545 of the Income Tax Assessment Act (ITAA) 1997. The non-arm’s length component is taxed at the highest individual marginal rate which is 45% in the 2019-20 income year.

Non-arm’s length income

The non-arm’s length component for an income year is the complying SF’s “non-arm’s length income” (NALI) for that year less any deductions to the extent that they are attributable to that income.

NALI picked up on audit – even higher tax

The recent case in GYBW v. Commissioner of Taxation [2019] AATA 4262 (GYBW) is a cogent reminder of how NALI taxed at the highest marginal rate can arise in a SMSF. In GYBW a tax shortfall arose as the NALI not returned by the SMSF was detected in an audit by the Commissioner of Taxation. Hence even higher taxes applied including shortfall interest and penalties. There was a reduction in penalties on appeal to the AAT from “reckless” to “failure to take reasonable care” level.

NALI

Section 295-550 is one of a number of superannuation rules designed to protect the integrity of the low tax complying SF regime by combatting income shifting arrangements where income, that might be taxed elsewhere to another type of taxpayer at higher rates, is non-commercially shifted to a complying SF that attracts a low rate of tax.

Section 295-550 is directed at non-arm’s length dealings where complying SFs (and other superannuation entities) earn income from an arrangement which exceeds the income that the complying SF might have been expected to derive from the arrangement if the parties to the arrangement had been dealing with each other at arm’s length.

Where section 295-550 is enlivened all of the income from the arrangement is NALI taxed at the highest rate.

Private companies dividends prone to be NALI

At the forefront of NALI is dividend income from investment by complying SFs in private companies.

In GYBW Senior Member McCabe identified an objective test in sub-section 295-550(2) which looks at a question of fact: is a dividend paid by a private company to a complying SF consistent with an arm’s length dealing? A private company dividend paid to a SMSF is NALI to the SMSF if it is not. This objective test replaced the former provisions in Part IX of the ITAA 1936 under which private company dividends were treated as special income (the forerunner to NALI) as a matter of course. That is, unless the Commissioner exercised a discretion that it was unreasonable to treat the private company dividend as special income where the Commissioner became satisfied that the income was earned at arm’s length.

Sub-section 295-550(3) sets out factors to be considered in applying the objective test.

The facts and findings in GYBW

In GYBW, the SMSF was the SMSF of a partner in an accounting practice with the pseudonym D. His client and connection pseudonym K had volatile and valuable business interests which could earn significant income from Department of Defence contracts.

D retired from his accounting practice to become the chief financial officer of the B Group.

The various partnership and corporate dealings of K are complex and supporting evidence of them before the AAT was “difficult” and incomplete. The AAT did not accept:

  • that the evidence, though involving non-related parties D, K, K’s trust and the other partners and former partners of K; and
  • that legal advice received before the SMSF invested in B Holdings;

supported a finding that the shares in pseudonym B Holdings acquired by D’s SMSF were acquired on terms where dividends would be earned from the shares consistently with an arm’s length dealing.

Senior Member McCabe observed how parties at arm’s length from each other can engage in an non-arm’s length dealing just as non-arm’s length parties can engage in an arm’s length dealing. For instance, in the latter case, a family member of the seller acquiring stock exchange listed shares of the seller on a stock exchange. Section 295-550 is directed to the dealing viz. how the SMSF came to earn the private company dividends it earned, not to the relationship of the parties to the arrangement. The AAT was therefore sceptical about the acquisition by D’s SMSF of ordinary shares in B Holdings on its formation for a nominal sum where B Holdings was also able to obtain and exploit K’s business interests a day later which D contended had negligible value then.

That AAT observed that “Fortune shined on the business” of B Holdings and B Holdings earned more than $10 million over four years which likely explains why it was picked up for an audit by the Commissioner.

Darrelen applicable

After looking at the Explanatory Memorandum with which section 295-550 was introduced Senior Member McCabe concluded that the purpose of the section did not change nor was there any change to the factors to which regard was to be had. Therefore the Full Federal Court decision in Darrelen Pty Ltd v Federal Commissioner of Taxation (2010) 183 FCR 237, which concerned the former provisions in Part IX of the ITAA 1936, remained authoritative in Senior Member McCabe’s view. In Darrelen the court had held that dividends paid by a private company were special income. In the case the SMSF had acquired its four shares in that company for a cost far less than their market value in an earlier year of income notwithstanding that the same dividend amount was paid on all 100 shares in the income year it was paid.

The cost to the SMSF of the shares on which the dividend was paid

The cost to the SMSF of the shares on which dividends were paid is a specific factor that can be taken into account under paragraph 295-550(3)(b) in determining whether their payment is consistent with an arm’s length dealing. In applying the objective test Senior Member McCabe referred to Commissioner of Succession Duties (SA) v Executor Trustee and Agency Co of South Australia Ltd (Clifford’s Case) where the High Court set out its views on how to value shares in a company:

The main items to be taken into account in estimating the value of shares are the earning power of the company and the value of the capital assets in which the shareholder’s money is invested. But a prudent purchaser does not buy shares in a company which is a going concern with a view to winding it up, so that the more important item is the determination of the probable profit which the company may be reasonably expected to make in the future, because dividends can only be paid out of profits and a prudent purchaser would be interested mainly in the future dividends which he could reasonably expect to receive on his investment. Further, a prudent purchaser would reasonably expect to receive dividends which would be commensurate with the risk, so that the more speculative the class of business in which the company is engaged the greater the rate of dividend he would reasonably require. In order to estimate the probable future profits of a company it is necessary to examine its past history, particularly the accounts of those years which are most likely to afford a guide for this purpose. In order to estimate the rate of dividend that a prudent purchaser could reasonably require on his investment it is necessary to examine the nature of the business and the risks involved and to seek the evidence of business men, particularly members of the stock exchange and experienced accountants, who can testify to the appropriate rate from the prices paid for shares in companies carrying on a similar business listed on the stock exchange or from private sales of shares in such companies or from their general business experience.

[1947] HCA 10; (1947) 74 CLR 358 at p.362

and with the benefit of hindsight, and omissions in the evidence supporting D’s SMSF’s case about how the SMSF and B Holdings came to benefit in K’s business interests, the AAT found that dividends were not consistent with arm’s length dealing as they arose from shares acquired for less than their value so evaluated. The AAT found that the dividends received by D’s SMSF from B Holdings were NALI.

NALI rules extended to expenses

The NALI rules have extended to losses, outgoing or expenditures that are less than expected to the complying SF by the Treasury Laws Amendment (2018 Superannuation Measures No. 1) Act 2019 in Schedule 2.

Conclusion

Unless GYBW is overturned on appeal SMSF investment in a private company of a related party or in a private company of the connections of the SMSF seem destined for NALI high tax treatment. So SMSFs should be wary of investment in private companies generally: SMSF investment in a private company carries the suspicion that the investment is an opportunity to shift income from a higher taxed entity to a concessionally taxed SMSF.

It follows that the trustee of a SMSF looking to sustain concessional tax treatment needs to adequately document its dealings with and investment in private companies so the arm’s length character of the investment can be verified and, where need be, independent valuation supporting consistency with arm’s length dealing should be sought.

Are there limits to interest deductions in Australia in participative loan arrangements involving entities in the same economic group?

Question on taxlinked.net members forum about Participative Loan Taxation

Since 1st January 2015 in Spain, interests are (interest is) not tax deductible when the participative loan is agreed to between entities of the same economic group. Is there similar treatment in your countries?

Response to post

Generally not in Australia.

In Australia interest is deductible if incurred on debt finance obtained to earn assessable income or to carry on a business even if debt finance arrangements include entities not dealing with each other at arms length.

These deductibility tests are serious purposive tests so non-arms length transactions attract particular scrutiny and, like in most jurisdictions, the burden of making out either purpose is on the taxpayer. As well as the general construct of sham there are a numerous specific instances where the Australian law denies interest deductions including:

  • sometimes where deductions are prepaid;
  • where there is not a sufficient relation between the loan and income received after a “commonsense” or “practical” weighing of the circumstances; and
  • where deductions are artificial or contrived or have those elements– if specific anti-avoidance rules do not apply.

Australia has a longstanding general anti-avoidance provision that can apply even if the interest deduction was otherwise available under the law. In international outbound financing the deduction can be lost because foreign income can be treated as other than assessable income. International debt/hybrid mismatch rules are being developed in Australia following some taxpayer success resisting anti-avoidance rules and the international experience.

Deductions are also lost if a “loan” is technically found to have characteristics of equity in substance.

Australian courts look at the role of associated entities to understand their purpose and look at transactions holistically. In other words they will focus on the economic units, rather than on juristic entities which seems to happening in Spain from what you say. Hence an interest deduction to an entity can be reduced, for instance, if the debt finance is on-lent to a related entity to earn income palpably less than the deduction.

Australia also has thin capitalisation rules which apply to limit otherwise allowable large cross border interest deductions.

Chevron Australia is involved in the first major transfer pricing case under the new BEPS regime where the Commissioner of Taxation is fighting to contend that interest paid and deducted exceeded the arms length amount based on BEPS arms length principles. The Commissioner won the first stage of the case in 2015.