On 25 May 2020, the Australian Taxation Office (ATO) issued Taxpayer Alert (TA) 2020/2, in relation to mischaracterised arrangements and schemes connected with direct foreign investment into Australian businesses.

ATO is concerned that these arrangements are deliberately structured to avoid Australian tax that is payable on the return to the foreign investor, or to obtain a tax deduction for the Australian entity.

Based on TA 2020/2, the relevant arrangements typically display one or more of the following features:

  • The Australian resident entities are unable to obtain capital from traditional external debt finance sources on normal terms;
  • The foreign investor either already participates in the management, control, or capital of the Australian entity at the time of investment, or starts to participate in the management, control or capital as part of the investment;
  • The investment has features not consistent with vanilla debt or equity investments; and
  • The investment may provide the foreign investor with direct exposure to the economic return from a particular business or assets of the Australian resident (whether ongoing profit or a gain on disposal).