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An Australian Taxation Office warning on tax planning that splits trading businesses to re-characterize trading income for tax beneficial purposes could deter foreign investment in major infrastructure, tax professionals say.
An ATO alert on the use of stapled structures, which often involve a business and a trust in the same tax arrangement, would potentially affect numerous industries and had been introduced with only limited consultation, Sydney-based tax partner Ellen Thomas of Norton Rose Fulbright told Bloomberg BNA Feb. 7
A PricewaterhouseCoopers briefing agreed that the alert was unexpected, adding that it “raises more questions than answers.”
In its Jan. 31 Taxpayer Alert 2017/1, the ATO said it was concerned that single businesses are being divided in a contrived way into structures involving an operating company and a trust.
The result is that the company is unlikely to have significant taxable income because of deductions for payments to the trust—income distributed from the trust is either not taxed at all or is taxed at a low rate.
“These arrangements have the potential to erode the corporate tax base, particularly where they are promoted to overseas investors as a way to acquire tax advantages in Australia,” the alert said.
The ATO will focus on the arrangements between entities within the stapled structure, such as ensuring the operating entity retains “a sufficient share of the profits,” it said.
Thomas said the type of structures specified by the ATO were very common in Australia, particularly in the infrastructure sector.
The alert was “a bit of a surprise” and the ATO had not consulted widely before issuing it, she told Bloomberg BNA by phone.
The ATO had signaled it would examine the way assets are split in a stapled structure, but infrastructure projects often involve a complicated mix of assets and it’s “less clear which assets belong in which vehicle,” Thomas said.
Thomas noted that Australia’s use of stapled structures is very well known to foreign investors, who would have little reason to think they were to undergo increased scrutiny.
However, the ATO’s alert has now created “a level of uncertainty” and also appeared to be at odds with efforts by Treasury to encourage more foreign investment into Australia, she said.
Thomas urged the ATO to provide “more information about exactly what its concerns are,” noting that these hadn’t been sufficiently described in the alert.
Nevertheless, she said it provided a good opportunity for infrastructure groups “to look at their structure and commercially what they are trying to do,” and to weigh alternatives such as using a single corporate structure.
A PwC briefing on the alert said it raised more questions than answers, pointing out that it doesn’t specify what types of assets—such as toll roads, airports, windfarms, solar assets, utilities, ports and telecommunications—might be acceptable to be held in stapled structures.
Nor does it specify whether the warning applies to existing structures or only prospectively to new ones.
It would now be important for businesses to engage with the ATO to understand its position on whether a particular structure would be acceptable, PwC added.
The alert is specific about not applying to privatizations, but the ATO provides no detailed reasoning for the carve-out, PwC said.
The ATO also said its warning does not extend to an Australian real estate investment trust (A-REIT) which derives all or most of its rental income from unrelated third-party tenants and which has not entered into arrangments such as those with stapled structures.
Meanwhile, a briefing by law firm Greenwoods & Herbert Smith Freehills said stapled infrastructure groups would now need to look closely at their arrangements “or risk raising the ire of the ATO.”
Greenwoods pointed out that the alert outlines various approaches the ATO might apply to eliminate any tax benefit it considers questionable, including using Division 6C and Part IVA of the Income Tax Assessment Act 1936.
Greenwoods also noted that the ATO is separately consulting on key tax issues associated with infrastructure privatization
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