The Australian tax liability of gains made by a non-resident investor is contingent on whether the gains are 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 (that is, greater than 10% interests) in entities that are Australian land rich (that is, 50% or more of the entity's total assets are Australian land).

Where the gains made by non-residents are of a revenue nature (that is, : 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.

The new draft tax determinations (TDs) outline the ATO's views and may cast doubt on the current private equity market practice. In particular:

TD 2009/D18. The ATO considers that the disposal of assets by a private equity entity may be included in the ordinary income of that entity, although the ATO acknowledges that each case depends on its own facts.

Consequently 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.

Where gains are characterised as capital, non-resident private equity firms will generally be able to access the more concessional capital gains tax treatment. Australia's capital gains tax provisions were amended in 2006 to limit the liability of non-residents to capital gains made on taxable Australian property. The amendments were introduced to "…encourage investment in Australia by aligning Australian law more consistently with international practice..." and to "…provide greater certainty and generally low compliance costs for investors." However, while the amendments reduced the scope of the capital gains tax provisions, they did not prevent the taxation of gains as ordinary income (where applicable).

Where the gain is considered to be income, additional questions remain as to whether the gain is sourced in Australia. Australia has no statutory test to determine the source of ordinary income – rather it is determined by reference to the relevant facts and case law principles.

TD 2009/D17. This 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 that 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 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.

Notwithstanding this, 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.

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 as to their potential impact on Australia's capacity to attract foreign capital.

The issue has also become a political one, 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.

Loan securitisations are, broadly speaking, concerned with the transfer of a lender's rights, but not obligations. Under revolving facilities and partly drawn or undrawn facilities, the lender will have funding obligations. Depending on the loan terms, a lender may have other types of obligations too. A lender can assign the benefit of a loan agreement, but not the obligations. Obligations must be "transferred" by novation, meaning a new contract must be entered into by the new lender and the borrower.

On the facts of Goodridge, the original lender retained the ongoing funding obligations in respect of the margin loan, but the assignee lender (a securitisation vehicle under an equitable title securitisation programme) purported to hold the rights in respect of that loan.

Whilst this separation is not necessarily problematic in all cases, in the context of a margin loan, the court found that the nature of the rights and obligations were so interdependent as to be incapable of separate transfer. The court was concerned that if it allowed the assignment without the novation, it would result in a separation of, on the one hand, the agreement as to the criteria and use of powers on which the original lender would be bound to lend further amounts (which would be held by the securitisation entity), and on the other hand, the obligation to lend further amounts (which would be held by the original lender). Such powers and duties were incapable of assignment (without novation) as they were "inherent and necessary" to both the original lender's and the assignee lender's rights and its obligations under the whole agreement.

Going forward, the case raises the prospect of a re-assessment of the manner in which some securitisations are conducted. In particular, equitable title securitisations will require a clear assessment of the relationship between the rights and obligations of the lender to determine whether or not they may be separated, and the rights effectively assigned.

Features involving the commitment of further funding – such as redraws and undrawn advances – may in particular be impacted, depending on the terms of those arrangements. Additional diligence will be required in relation to the terms of these arrangements. An issue for securitisation participants will be the introduction of qualifications to legal opinions as to the effectiveness of the underlying assignment.

As with a securitisation, a lender seeking to effect a sell-down by transfer of rights will need to consider whether the nature of any lending obligations mean that a formal novation is required, and how that novation would be effected. A lender seeking to transfer its "rights and obligations" will be determined to ensure that a novation has been effective.

A basic principle of contract law is that a novation of obligations under a loan contract without the consent of the borrower will be ineffective – irrespective of whether the terms of the underlying loan agreement purport to permit such a dealing. Assignment provisions in many loan documents are drafted simply to state that a lender may transfer its obligations without borrower notice or consent, which may overreach what is legally possible.

The case also expressed doubts as to whether a borrower can prospectively authorise a lender to novate its loan without any further involvement or knowledge of the borrower, and examined the nature of such an authority. Whilst finding that a lender's documented right to transfer or novate obligations without borrower consent is not of itself a sufficient authority from the borrower, the decision need not be taken as authority that a well documented agency authorisation and novation substitution mechanism (such as found in a syndicated loan document) is ineffective to transfer of rights and obligations. The case did not examine such a situation. However consideration may need to be given to the procedures involved as concerning the borrower.

In syndicated arrangements, the borrower has typically appointed a party (the facility agent) to act as its agent for a specific purpose to enter into and effect contractual novations of existing lenders to third parties. In Goodridge, there was no such authorisation – the court held that the purported waiver of the borrower's consent right in the loan provisions was fundamentally different from the situation where the borrower had specifically authorised an agent to act in a specified manner on its behalf.

The judge in Goodridge did not specifically seek to reduce the role of agency law. However it would be prudent to ensure that the substitution provisions include all the following characteristics:

Many syndicated loan agreements will already contain provisions in these terms, but the agreements should be checked. It should also be possible to reflect the above mechanism in bilateral loan agreements, although this may not be commercially acceptable to strong borrowers.

The case has clear implications for the margin lending industry and equitable title securitisation transactions, but also for a range of other loan transactions where lenders wish to understand their sell-down rights. This will particularly be the case where a simple assignment provision is relied on as being authority to transfer a lender's rights and obligations under a facility. The nature and interdependency of a lender's rights and obligations will need to be considered in the context of an assignment of rights. If a novation is required (or desired) to effect the transfer sought, consideration will need to be given as to how to effect the novation.

Whilst the case should not impact upon the sell-down mechanism typically adopted in syndicated loan agreements, the underlying provisions and procedures on sell-down should be reviewed on a case by case basis.

A development company, B&B Holdings, borrowed money from the first, second and third mortgagees and gave mortgages over various properties in support of its loans. A director of B&B Holdings and his wife guaranteed repayment of each of the loans.

B&B Holdings then defaulted under the first mortgagee's loans. The guarantors sold properties they owned and applied the proceeds in reduction of the first mortgagee's debt. The first mortgagee then exercised its power of sale to recover the balance owed by B&B Holdings. After satisfying the balance of the indebtedness owed, the first mortgagee paid the surplus to the second mortgagee and delivered to the second mortgagee certificates of title and discharges of the first mortgages over two unsold properties.

The guarantors contended that the first mortgagee should have paid the surplus proceeds to them so that they could recoup, under their right of subrogation, what they had paid to reduce the indebtedness of B&B Holdings.

In a unanimous decision, the High Court overturned a decision of the New South Wales Court of Appeal and found in favour of the guarantors.

The court found that the guarantors, having paid down some of the first mortgagee's debt, had the right to the surplus proceeds and the first mortgagee should have accounted to them. Having paid the second mortgagee, the first mortgagee was still liable to the guarantors. This was based on the principle of subrogation which allows a guarantor, having paid off the guaranteed debt, to stand in the shoes of the lender and have all the rights of the lender against the borrower.

Prior to this case, mortgagees would have taken comfort from section 58(3) of the Real Property Act 1900 (NSW) which requires the proceeds from the sale of land by a mortgagee to be applied first in payment of the first mortgage and second in payment of the second mortgage and so on. However, the court found that "upon that first mortgagee equity may place requirements as to the disposition of the surplus purchase money".

The court found that the guarantors could have excluded their right of subrogation by agreement or conduct but the terms of the documentation in this case did not operate in that way.

The effect of the decision is that whilst the guarantors were still liable under their guarantees to the subsequent mortgagees, their liability should have been treated as unsecured.

First mortgagees. These will need to take legal advice before they distribute any surplus enforcement proceeds or property following repayment of their debt, if there are subsequent registered mortgagees and a guarantor has made a payment to the first mortgagee.

Second and later ranking mortgagees. Any second or later mortgagee will need to carefully examine the documentation they use when the first mortgagee's debt has been guaranteed. Such mortgagees would want their guarantee and inter-creditor/priority agreements to both:

The development and use of forward start financings to offset refinancing risks for medium to large corporates has grown in Australia over the past 18 months following global (and especially UK) financing trends. Forward start financings were created and became popular in the face of the capital constraints on bank lending characteristic of the global financial crisis.

Forward start financings enable corporate borrowers to reduce their refinancing risks and extend debt maturities in return for providing higher margins on existing loans and additional up-front and top-up fees to those banks in their lending syndicate who are willing to commit to forward start financings. The earlier a forward start is agreed, the greater the return for the committing banks. By locking in a refinancing, corporate borrowers can boost or stabilise investor and underwriter sentiment, creating a more stable platform for any potential equity raising.

Australian corporate borrowers who have recently entered into forward start financings include:

The four major Australian banks - National Australia Bank, Westpac Banking Corporation, Commonwealth Bank of Australia and Australia and New Zealand Banking Group - have been regularly reviewing and participating in forward start financings.

Fees, commitments, conditionality. The timing of lender commitments and associated fee and margin obligations are an ever present issue in forward start financings due to the time overlap of commitments. Borrowers will want fees to start accruing and be paid as late as possible, but without jeopardising early commitments. Some thoughts from recent experiences are as follows:

Repricing risk. As pricing is fixed from the date of the forward start agreement, there is a repricing risk faced by both the borrower and the forward start lenders.

Amendments, waivers and breaches. The forward start agreement will need to deal with whether amendments or waivers to the existing facility (after the forward start agreement is signed) will apply to the forward start agreement. An obvious but important issue to cover is to ensure that entry into the forward start agreement does not breach any terms of the existing facility or other relevant pre-existing agreements.

Capital treatment. No official guidance has been given by APRA or ASIC as to whether a forward start lender has a double credit exposure prior to maturity of the existing facility. If correctly structured the answer should be no.

Use of proceeds. Can proceeds drawn under the forward start financing be used for a purpose other than repayment of the existing facility?

Proposing a forward start financing in a restructuring/workout/watch-list scenario could give a borrower group leverage in negotiations with the current syndicate. Large and diverse bank syndicates can be difficult to mobilise in such scenarios. Unanimous approval may be required under existing agreements for any extension of debt maturity dates, often a key plank in a restructuring. A borrower could entice the bulk of the syndicate to move to a forward start financing, subject to agreement on acceptable margin and fee increases and committing lenders to increasing exposures. Existing facility documentation needs careful review as part of this process to ensure forward start agreements (and associated negotiations) are not themselves breaches requiring unanimous consent. The viability of using forward start financings in restructures also depends on availability of cashflow to service higher up-front and ongoing fees.

Commentators suggest that the momentum in forward start financings could dissipate in the next six to 12 months as (and if) prices for refinancings (and new) financings continue to rise towards pre-global financial crisis levels. If bank lending and capital markets continue to thaw, corporate borrowers gradually deleverage and bank balance sheets become less constrained, refinancing risks and therefore the need for forward start financings may diminish.

Recent experiences with the Australian market indicate that banks have began underwriting new loans and agreeing to refinancing existing facilities, however, these refinancings have been limited to certain industry sectors, such as healthcare.

Forward starts remain attractive for lenders where new margins are substantially higher than existing margins. Forward starts are also likely to remain relevant in the short term, especially for sectors which the banks are weary of maintaining or increasing their exposure, in particular, the commercial property sector.