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The Australian Legal Update explains recent changes to a broad range of Australian laws of particular interest to overseas businesses dealing with Australia.
To email any of our lawyers please use firstname.lastname@minterellison.com
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> Taxation of employee share schemes – new laws
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Some unexpected changes have highlighted the introduction of new employee share scheme legislation, which received Royal Assent on 14 December 2009. Companies will need to give the legislation close consideration given the impact it will have on employee equity plans, particularly the drafting of plan rules and offer documents.
The new regime will apply to shares or rights acquired from 1 July 2009, and provides for the following:
a $1,000 tax exemption for 'non-discriminatory' schemes where there is no 'real risk of forfeiture', but subject to a holding period requirement and available only where an employee's 'adjusted taxable income' is $180,000 or less;
tax deferral for shares or rights provided there is a 'real risk of forfeiture', with tax deferred until the earlier of:
- when the 'real risk of forfeiture' is removed and there are no longer any 'genuine restrictions' on the disposal of the interest;
- in the case of rights that are exercised, when any 'genuine restrictions' on the ability to dispose of the underlying shares are lifted;
- termination of group employment; and
- 7 years after the acquisition of the shares or rights,
a $5,000 'salary sacrifice' tax deferral concession, which has now been extended to rights as well as shares, although the rights (or resulting shares) must be subject to a 'real risk of forfeiture'; and
a new annual employer tax reporting and withholding regime, which requires employers to report the details of employee shares and rights, including estimated market values, to both the Australian Taxation Office (ATO) and their employees.
There is concern though that the new legislation denies a tax refund to those employees who have been taxed on their rights (e.g. on cessation of group employment), but who later forfeit those rights as a result of choosing not to exercise them (e.g. because the rights are 'underwater'). This is despite the clear inequities involved and the widespread calls from industry groups and the tax profession to reconsider this proposal.
Companies will need to give the legislation detailed consideration given the impact it will have on employee equity plans, particularly the drafting of plan rules and offer documents. Care will need to be taken when setting plan terms and conditions to ensure employees are not disadvantaged by the new regime. This will require careful review of performance and vesting conditions, the circumstances in which rights or shares may be retained in events such as termination of employment, and the circumstances in which shares may be disposed of.
For further information please contact:
Michael Whalley, Partner
+44 20 7448 4801
michael.whalley@minterellison.com |
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> Proposed changes to foreign investment rules
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The Foreign Investment Review Board (Board), being the Australian government body that examines proposals for foreign investment in Australia, recently announced that the monetary thresholds set for the purposes of compulsory notification to the Board of a proposed acquisition will be revised to:
- AUD231 million, for private business investment (up from AUD219 million); and
- AUD1004 million, for US investors under the Australia-US Free Trade Agreement (up from AUD953 million).
The relevant legislation is likely to be updated in the near future to reflect this announcement.
Other changes which are proposed to the Australian foreign investment rules concern the meaning of acquiring a 'substantial interest' for the purposes of Foreign Acquisitions and Takeovers Act 1975 (Cth) (Act). The proposed changes aim to ensure that the Act applies equally to all foreign investments irrespective of the way they are structured. The amendments are expected to have retrospective effect from 12 February 2009.
The following table, extracted from the explanatory memorandum relating to the proposed new law, provides a summary of the proposed changes.
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New law |
Current law |
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Substantial interest is holding at least 15 per cent of one or more of:
- voting power;
- potential voting power;
- issued shares; or
- rights to issued shares.
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Substantial interest is holding 15 per cent or more of the voting power or the issued shares in a corporation. |
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Aggregate substantial interest is two or more persons holding at least 40 per cent of one or more of:
- voting power;
- potential voting power;
- issued shares; or
rights to issued shares. |
Aggregate substantial interest is two or more people holding 40 per cent or more of the voting power or the issued shares in a corporation. |
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An interest in a share has been clarified so that it is clear that a right to a share includes a right to acquire a share or have a share transferred under an instrument, agreement or arrangement, whether the right is exercisable presently or in the future and whether on the fulfillment of a condition or not (such as convertible notes). |
An interest in a share includes a right to acquire a share or have a share transferred to them. |
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Definition of voting power has been clarified so that it explicitly includes potential voting power. Potential voting power is the number of votes that could be cast if it is assumed that a future right is exercised. |
Voting power is the maximum number of votes that can be cast at a general meeting. |
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The Treasurer also has the power to prohibit a proposed acquisition of an interest that would result in a foreign person having control of the potential voting power in a corporation if it is considered contrary to the national interest. |
The Treasurer has the power to prohibit a proposed acquisition of shares that would result in a foreign person having control of the voting power in a corporation if it is considered contrary to the national interest. |
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Compulsory notification for proposals involving the acquisition of a substantial interest. |
Compulsory notification for proposals involving the acquisition of a substantial shareholding. |
For further information please contact:
Michael Whalley, Partner
+44 20 7448 4801
michael.whalley@minterellison.com |
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> Australia – Progression, not recession
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The concern expressed in our last Australian Legal Update about the possibility of Australia following most of the rest of the developed world into recession fortunately proved unfounded. Australia has been a notable exception to the experience of many other countries in this respect.
One quarter of negative growth (Q4 2008) was not enough to drag the economy down, and the country rebounded with positive GDP growth throughout 2009, posting a year-on-year real increase of 0.5% (USA: -2.6%, UK: -5.1% and Germany: -5.1%). Of the leading economies, only China, India and Korea exceeded that growth. The strength of the Asian economies was Australia's salvation, as their continuing growth sustained demand for raw materials and kept mineral prices high.
With interest rates also kept high (controlling inflation at around 1.3%), the Australian dollar has also surged against world currencies, gaining against the US dollar (+32.8%), the Euro (+28.5%) and sterling (+20.1%) over the course of 2009.
With strong demand for our raw materials, unemployment has been held to 5.5% nationally (while it approaches 10% in the Eurozone and the UK), with the best figures (5.1%) belonging to the mining boom economy of Western Australia.
Other domestic activity seems to suggest that consumer confidence has not been substantially eroded by the global crisis. Christmas sales at the end of 2009 remained robust, while the demand for property maintained, and in some areas increased, property prices. The global credit shortage arising from banks needing to strengthen their balance sheets encouraged businesses to seek new equity, with rights' issues and other capital raisings booming in 2009, making it an active year on the Australian stock markets.
Australian banks continued to hold their credit ratings and post strong returns as others around the world tumbled, with National Australia Bank rumoured to be a contender for the "good" reconstituted Northern Rock bank in the UK.
This is therefore a good time for Australia to reappraise its standing in the international financial and business community. The recently released report of the Australian Financial Centre Forum stresses that Australia can leverage off its regulatory strengths (which helped its institutions weather the global crisis effectively), and its sophisticated funds management industry (the fourth largest in the world), to make it an attractive location for international banking and financial business. Following the release of the report, many business leaders have called for tax breaks for business to compete with Singapore and Hong Kong in the region, and the Henry Tax Review may be addressing this. It is to be hoped that the Federal Government will be able to meet this need, despite the demands on its budget of financing continuing economic recovery.
So we go into 2010 in better heart than at the beginning of 2009, but with continued concerns about the impact that any stalling in the recovery of world economies and markets could have on Australia. Cause for cautious optimism, perhaps.
For further information please contact:
Michael Whalley, Partner
+44 20 7448 4801
michael.whalley@minterellison.com
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> Australian Tax Office focuses on private equity
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The Australian Taxation Office's unsuccessful attempt to freeze the bank accounts of the private equity firm Texas Pacific Group has highlighted the ATO's new focus on private equity activities in Australia. The attempted freeze followed the stock market float of the Myer Group, as the ATO sought a reported tax bill of $A452 million from TPG.
It's likely that the Revenue authorities will have learned some valuable lessons from their failed attempt to prevent the proceeds of the sale leaving Australia. The ATO has issued two draft determinations outlining their views on gains made by private equity.
Private equity firms investing in Australia have now been put on notice in relation to the ATO's view and therefore should be in a better position to both mitigate existing risk, and to reconsider their investment and divestment strategies.
Background
The Australian tax liability of a non-resident is contingent on whether the gain is characterised as capital or as income. Where the gain is a capital gain, Australian tax liability will be limited to gains made in relation to Taxable Australian Property. Broadly, Taxable Australian Property includes Australian land and non-portfolio interests (ie: greater than 10% interests) in entities that are Australian land rich (ie: 50% or more of the entity’s total assets are Australian land).
Where the gains made by non-residents are of a revenue nature (ie: income), and are sourced in Australia, Australia will seek to tax those gains subject to any relief available under an applicable tax treaty.
The facts and circumstances of each case will determine whether a gain is capital or revenue. Generally, private equity firms have treated the gains made on the disposal of their Australian investments as being on capital account. Prior to the TPG/Myer float, the ATO had not publicly stated a view in relation to gains made by private equity firms.
New draft determinations
The new draft tax determinations outline the ATO's views and may cast doubt on the current private equity market practice, in particular:
TD 2009/D18 considers whether gains made by private equity firms on the disposal of target assets are to be treated on revenue or capital account; and
TD 2009/D17 considers whether the use of certain offshore corporate structuring to obtain tax outcomes pursuant to Australia's tax treaty network attracts the application of Australia's general anti-avoidance rules.
TD 2009/D18
The ATO considers that the disposal of assets by a private equity entity may be included in the ordinary income of a private equity entity (that is as a revenue gain and not as a capital gain), although the ATO acknowledges that each case depends on its own facts.
Consequently, this means that private equity entities will need to assess the character of the gain made on the disposal in light of the relevant case law. The uncertainty around the risk that the ATO may seek to treat gains made on the disposal of assets as revenue gains will undermine investor and market confidence.
TD 2009/D17
TD 2009/D17 has practical relevance for the offshore structuring of private equity firms, particularly where Australian sourced revenue gains are derived. The ATO considers that Australia's general anti-avoidance provisions may apply where a taxpayer has obtained a tax benefit in connection with a structure which is designed to alter the intended effect of Australia's tax treaties.
Specifically, where an offshore structure involves the interposing of a holding company or companies resident in a treaty country between:
- an ultimate tax haven entity that is used as the collective investment vehicle structure for private equity firms; and
- the Australian entity holding the target assets
there is potential for the tax haven entity to obtain a tax benefit under the structure to which the general anti-avoidance provisions will apply.
However the ATO acknowledges that there may be sound commercial reasons for the interposition of such entities, but in the absence of such reasons, the inference to be drawn is that the structure was established to obtain a tax benefit.
Comment
Despite the fact that the ATO 's determinations are still in draft and subject to public consultation and review, the uncertainty created by these views has been the subject of considerable debate and concern, particular their potential impact on Australia's capacity to attract foreign capital.
The issue has also become a political, in light of the Government's policy of promoting Australia as a financial services centre.
Ultimately, the Government may legislate to limit or overturn the ATO's current position. However, it would be prudent for private equity firms to review existing structures and activities to determine the impact of the determinations on their Australian investments.
We would be pleased to assist you in mitigating the risks and identifying alternatives to your current strategies.
For further information please contact:
Peter Capodistrias, Partner
T:+ 2 9921 4447
peter.capodistrias@minterellison.com |
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Adelaide:
Nigel McBride
Managing Partner Adelaide/Darwin
| T: | +61 8 8233 5697 |
| F: | +61 8 8233 5556 |
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Brisbane:
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Canberra:
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Darwin:
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Gold Coast:
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Hong Kong:
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London:
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Melbourne:
John Steven
Partner
| T: | +61 3 8608 2907 |
| F: | +61 3 8608 1164 |
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Perth:
John Poulsen
Managing Partner
| T: | +61 8 9429 7444 |
| F: | +61 8 9429 7666 |
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Shanghai:
Yi Yi Wu
Partner and Chief Representative
| T: | +86 21 6288 2171 |
| F: | +86 21 6288 2172 |
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Sydney:
Leigh Brown
Partner
| T: | +61 2 9921 4941 |
| F: | +61 2 9921 4419 |
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John Weber
Chief Executive Partner
| T: | +61 2 9921 4500 |
| F: | +61 2 9921 8117 |
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