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PLC Global Finance update for December 2010: Australia
Practical Law Article 3-504-2786 (Approx. 4 pages)
PLC Global Finance update for December 2010: Australia
by Minter Ellison
| Published on 22 Dec 2010 • Australia |
The Australia update for December 2010 for the PLC Global Finance multi-jurisdictional monthly e-mail.
Corporate loans and securities
The Personal Properties Securities Act 2009 (PPSA) is due to come into effect in Australia in 2011. The PPSA will create a national system for the registration of security interests over personal property recorded via the personal property securities register (PPSR).
One of the key industries to be impacted by this legislation is the important Australian energy and resources sector. The PPSA will provide benefits and challenges, to lenders, borrowers and other participants in the energy and resources sector in Australia.
Differences due to State rights
While the PPSA expands the scope of property over which security interests can be registered, it is expected that it will not apply to certain mining interests such as licences and leases. In order for the PPSA to apply to these types of mining interests, legislative power will need to be referred from the various states to the federal government. The PPSA operates such that if States declare that certain State conferred rights, licenses and authorities are not personal property, they will fall outside the scope of the PPSA. To date, Queensland, New South Wales and Victoria have declared that various mining interests are not personal property and therefore the PPSA will not apply. The Tasmanian Parliament is currently considering Bills which will have the same effect. However, despite passing referring legislation, South Australia has not yet declared that mining interests are not personal property. Western Australia has neither passed legislation nor does it have any Bills in Parliament related to the PPSA, however we expect that they will also declare that certain mining interests are not personal property for the purposes of the PPSA.
Key changes
Some of the key areas where the PPSA will impact on the energy and resources sector are:
- New grantors.The types of grantors over which security interests can be registered will be significantly expanded. Generally, security interests over personal property can only be registered on the Australian Securities and Investments Commission register of charges where the grantor is registered under the Corporations Act 2001 (Cth), although there are some other exceptions such as security interests over motor vehicles. However, under the PPSA, security interests could be registered over:
- individuals;
- partnerships;
- bodies holding an Australian Business Number (such as a joint venture); and
- non-Australian bodies if the property the subject of the security interest is located in Australia.
- Substance over form.The PPSA has taken an approach of substance over form and accordingly a number of interests previously not deemed to be security interests will now comprise security interests. This means that people need to ensure that they have adequately protected their interest in personal property by registering a security interest on the PPSR. Interests that will become registrable include:
- the right of a lessor in property provided on hire purchase or leasing arrangement;
- the right of vendors of property who sell the property on deferred payment terms. This sort of interest is called a purchase money security interest and has 'super priority' over other security interests under the PPSA; and
- the suppliers of property with retention of title arrangements.
Many lenders who have dedicated teams to transitioning to the PPSA regime may also need to educate their borrowers regarding these issues as a lender's rights in personal property may be lost if its borrower does not properly secure its interest in that personal property. - Dilution provisions in JVs.Joint venture agreements in the energy and resource sectors often contain dilution provisions allowing one party to dilute the interests of another if certain requirements are not met (for example; if capital calls are not met). As a dilution provision in an agreement grants a person the right to acquire the personal property (such as a joint venture interest) of another party if that person fails to perform an obligations (such as the payment of called sums), it is arguable that these interests will now need to be protected by registration on the PPSR.
Tax
The Australian Tax Office (ATO) recently released two final tax determinations and two draft determinations that impact both resident and non-resident investors in Australian Private Equity investments and their investors.
These rulings provide useful guidance to private equity funds and investors as to the tax risks and outcomes of investing in Australia.
Taxation Determination (TD) 2010/21 outlines the factors that the Australian Taxation Office will consider when determining if a profit on the sale of shares is income or a capital gain. The TD confirms the position in the earlier draft TD that private equity funds will more likely derive income, as opposed to capital gains. The ATO's view is not a surprise and given the capital/revenue issue is fact based and not easily determined, resident private equity funds are likely to now look to qualify as a managed investment trust to access the 'safe harbour' election.
Draft Taxation Determination 2010/D7 deals with the source of the profit in a leveraged buyout of an Australian company and follows on from TD 2010/21. The ATO's view is that though the place of contact (for example; where were it is negotiated, concluded, executed and performed) has some relevance it is not the sole determinant but rather it is necessary to consider where the activities that impact on the profit are carried out. The draft TD considers the relevant factors in determining the source and include what was acquired and where it was located, who decided on the acquisition, who funded the acquisition, and where the funding entity is resident. This Draft TD moves away from previous ATO positions that have placed greater emphasis on place of contracts, it highlights the difficulties on the issue of source by the Australian Taxation Office and it is likely to generate considerable debate that may have more wide ranging impact including in relation to investment vehicles Fin 48 disclosures.
Taxation Determination 2010/20 confirms that Australia’s general anti-avoidance provisions are likely to apply to deny the benefits of a double tax agreement for inbound investors where there is no commercial substance in structuring an investment through a particular country with which Australian has a double tax agreement. However there is some good news in this TD in that the ATO considers that a tax benefit for the purposes of the general avoidance provisions may not arise if the Cayman entity is a limited liability partnership and the offshore investor is a resident in a country with which Australia has concluded a treaty.
Draft Tax Determination 2010/D8 outlines the ATO's view that residents in a treaty county which invest in Australia through fiscally transparent entities in another jurisdiction will be able to access treaty relief.
The key conclusion for resident private equity funds is to seek to qualify as managed investment trusts and access the capital gains safe harbour election. Non resident private equity funds may look to structure their Australian investments through fiscally transparent vehicles to enable their investors to access treaty relief and ensure there is commercial substance where the entity is not transparent and is a resident for the purposes of a relevant double tax treaty.
Australia's Board of Taxation has issued a discussion paper on the taxation treatment of Islamic financial products in Australia. Recognising the importance of Australians having access to Islamic financial products, the Australian government had asked the Board to identify impediments in the Australian tax laws, at both State and Commonwealth levels, which might currently prevent or discourage access.
In determining the policy response the discussion paper examines the development of Islamic financial products in other jurisdictions, including the United Kingdom. The Board has been asked to make recommendations for Commonwealth laws and findings for State laws that will ensure that Islamic financial products are taxed in the same way as conventional financial products to which they are economically equivalent. The purpose of the discussion paper is to determine whether Islamic financial products can be worked into the existing Australian taxation framework or whether new provisions directed specifically at Islamic financial products will need to be developed. The Board is at the early stages of the consultation process.
At this stage, the general approach of the discussion paper is that Islamic financial products can fall within some of Australia's existing taxation framework, including the taxation of financial arrangements (TOFA) rules, and other income tax rules (such as the debt/equity rules) as those rules consider the substance of the product in question. Other taxation rules which focus more on the form of the product may require some adaptation as they can lead to differing results for Islamic financial products and conventional financial products. The Board notes some examples of these issues which arise with Australia's capital gains tax, goods and services tax, interest withholding tax, and State imposed stamp duty provisions, which may be an impediment to Islamic financial products in Australia.