DESCRIPTION
Arrangements covered by this Alert show at least one, but may show several, of the following relevant criteria: a. the arrangement which is returning non-assessable non-exempt income is in substance the provision of financial accommodation to an unrelated party and by contrivance the return for the provision of financial accommodation is made a non-portfolio dividend from a related party; b. the arrangement which is returning non-assessable non-exempt income is in substance an investment by a non-resident entity in another non-resident entity, where Australia is artificially interposed in the investment to secure a tax deduction matched by non-assessable income; c. the arrangement which is returning non-assessable non-exempt income is in substance an investment by an Australian resident in another Australian resident, and a non-portfolio investment in a non-resident company is artificially interposed in the investment to secure non-assessable income; d. the arrangement which is returning non-assessable non-exempt income is designed to match the income with the cost deducted under section 25-90 to secure a '"free" tax deduction. Funds advanced under the arrangement are effectively returned to the provider of the funds, or an associate. Promissory notes or other non-cash means of making advances may be employed; e. the structure used in the arrangement is unduly complex or contrived - an example of such complexity is where an entity is interposed into the arrangement structure where such interposition is unnecessary from a commercial viewpoint. In some cases, the Australian resident may be instructed by the marketer or lender to add apparently unnecessary layers of complexity to the financing arrangement; f. absent the tax benefits, the arrangement has little or no commercial or economic purpose; g. the flow of funds in the arrangement is circular, so that the funds ultimately flow back to the initial investor or lender (for example, a borrowing from the capital markets may be linked to the counterparty to the transaction); or , h. there may be no commercial reason for involving an Australian resident entity in the transaction - that is, in an ordinary commercial arrangement the foreign entity would not have sourced its investment from Australia. For example, the arrangement might economically be an investment from Europe into Asia but routed through Australia apparently for the dominant purpose of obtaining tax benefits available under section 25-90 of the ITAA 1997; and i. deductions are claimed under section 25-90 in respect of costs incurred in deriving the non-assessable non-exempt income.
Relevant arrangements may also include one or more of the following features: a. many or all of the participants in the arrangement are related parties; b. the transaction may be structured in a manner such that no income or minimal income is included in the assessable income of the Australian resident entity under the controlled foreign company (CFC) and foreign investment fund (FIF) provisions; c. in economic substance, the income received from the non-resident entity is more like interest rather than a share of business profits; d. the net pre-tax return on the investment is less than the target rates of return of the entity in its general business; e. the return from the non-resident entity has been structured to eliminate the operational and market risk that would normally be expected from commercial business transactions; f. in the case of an investment by way of redeemable preference shares, returns are predetermined and the Australian entity is not entitled to participate in any upside of the investment; g. where the transaction structure has a variable element such as a floating return or variable rate of interest, this may be swapped for a fixed return or cost to lock in the income and fix the tax benefits generated by the arrangement; or , h. the transaction may be structured so that no tax or minimal tax is paid in the offshore jurisdiction. This includes arrangements where tax is paid offshore and then claimed back as a credit by an associated non-resident entity.
Some arrangements involve a third party who, although prima facie at arm's length, participates in the arrangement in order to share the tax benefits generated by the arrangement.
Such a third party will often be a marketer of the arrangement and will receive a fee that will generally take the form of a commercial return associated with the arrangement. In substance that commercial return will often be a disguised fee for marketing the arrangement.