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Phillip Fry
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Foreign residents exploiting asset valuations to avoid capital gains taxAustralian Taxation Office Taxpayer Alert TA 2008/20, November 18, 2008 This Taxpayer Alert describes certain arrangements where foreign residents seek to avoid capital gains tax from the indirect disposal of Australian real property under Division 855 of the Income Tax Assessment Act 1997 (ITAA 1997), circumventing the principal asset test by exploiting the valuation of non-taxable Australian real property assets (non-TARP). Description The alert applies to arrangements where foreign residents exploit the calculation of the market values of non-TARP assets to exceed the 50% threshold in the principal asset test when determining if they have an indirect real property interest under section 855-25. These arrangements include the following characteristics: 1. A foreign resident vendor with an existing interest of greater than 10% in Australian real property held indirectly through a chain of interposed entities intends to dispose of some or all of that interest. 2. Prior to the disposal, the vendor attempts to change the ratio of TARP to non-TARP assets through strategies such as: (i) injecting non-TARP assets into the Australian entities (or those higher in the ownership chain) by: (a) the intermediate holding entity (test entity) investing in Redeemable Preference Shares (RPS), issued by its Australian subsidiary, which directly holds the real property, (b) the test entity obtaining a loan from a 3rd party and on-lending the amount to its subsidiary (c) an inter-company loan (arguing that both the assets injected and the inter-company asset may be counted in calculating the ratio of TARP to non-TARP assets). (ii) selective valuation of TARP and non-TARP assets, in circumstances where such valuations are within the control of the vendor and could be carried out on a full market value basis. 3. If the market value of TARP assets does not exceed the market value of non-TARP assets, the foreign resident vendor argues that it does not pass the principal asset test, resulting in the interest disposal in the test entity being disregarded.
Features which concern us Depending upon the individual facts and circumstances, the Tax Office considers arrangements having the above mentioned features may give rise to taxation issues including whether: (a) the arrangement, or any transaction within it, may be a sham at general law (b) any amounts from the disposal must be included in the assessable income of the foreign resident vendor under section 6-5 of the ITAA 1997 (c) the market value of any TARP or non-TARP asset should be used in calculating whether the principal asset test in section 855-30 has been met (d) the operation of the integrity provision in subsection 855-30(5) of the ITAA 1997 prevents the injection of assets if done for the purpose of circumventing the principal asset test (e) any transaction may be subject to the transfer pricing provisions contained in Division 13 of the Income Tax Assessment Act 1936 (ITAA 1936) (f) any articles in applicable tax treaties between Australia and a relevant country may apply, especially: (a) the income from real property article (where applicable), (b) the business profits article (where applicable), (c) the associated enterprises article (where applicable), or (d) the alienation of property article (where applicable) (g) the general anti-avoidance rule contained in Part IVA of the ITAA 1936 may be applied to cancel any tax benefit under all, or some part, of the arrangement, and (h) any entity involved in the arrangement may be a promoter of a tax exploitation scheme for the purposes of Division 290 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953).
The Tax Office is currently reviewing these arrangements
. Date of Issue: 18 November 2008 Date of Effect: 18 November 2008
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