Tax alert. ATO Draft Privatisation and Infrastructure Tax Framework outlines ATO views and concerns, with some surprises.

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1 February 2017 Tax alert ATO Draft Privatisation and Infrastructure Tax Framework outlines ATO views and concerns, with some surprises At a glance Sets out the ATO s overall position on a range of infrastructure-related tax issues Identifies a range of structures and positions that the ATO considers to be high risk which will be a focus of its compliance review activity Planned consultation in which EY will participate ATO is going further than stated aim of providing taxpayers certainty by attempting to establish a prescriptive norm for the structuring of covered transactions and tax outcomes that, if successful, would only become more entrenched over time Number of instances where the ATO s position represents a u-turn, conflicts with long established industry practice or is difficult to support from a plain reading of the relevant tax law Threat of application of Part IVA is a pervasive theme throughout The ATO has released a draft Privatisation and Infrastructure - Australian Federal Tax Framework document (draft framework) to various stakeholders, including EY, for consultation and feedback by 28 April The draft was developed by the ATO s infrastructure and privatisation team to set out the ATO s overall position on a range of infrastructure-related tax issues. It is non-binding on the ATO but states that ATO officers are expected to follow the overall views set out therein. Importantly, it sets out how the ATO will apply its tax compliance resources to examine structures and test taxpayer positions not in accordance with the ATO s stated positions. The draft framework comprises all four chapters planned for the framework: Chapter 1 Construction of social infrastructure, particularly focusing on PPPs Chapter 2 Privatisation of government businesses into stapled groups Chapter 3 Other infrastructure related issues (e.g. grants, capitalising labour costs, negative control for Div 6C purposes, gifted assets, poles and wires) Chapter 4 Areas of ATO compliance focus We welcome the ATO release of the draft framework and planned consultation in which EY will participate. Although it raises numerous issues and concerns, it should result in greater clarity concerning the ATO s approach to the covered issues and the risks to groups who are subject to heightened ATO scrutiny and potential for tax disputation. The draft framework refreshes previous guidance on the tax treatment of typical public private partnership (PPP) structures and some areas of compliance focus. Other guidance, while new, generally reflects long accepted positions adopted by the industry and accepted by the ATO. However, there are a number of instances where the ATO s position conflicts with long established industry practice and is difficult to support from reading of the relevant tax law. The over reliance on the threat of the application of the Part IVA general anti-avoidance rule (GAAR) is concerning, albeit that it can be difficult to balance appropriate administration of the law for the benefit of the community and providing guidance to taxpayers. In this regard there should be scope for legislative amendments where appropriate, undertaking test cases on key issues of interpretation, and utilising existing frameworks such as the GAAR Panel to test certain positions in order to provide greater certainty. This ultimately needs broader economic policy consideration, including the importance of encouraging investment (including foreign investment). The draft framework also references the ATO s Taxpayer Alert TA 2017/1 which targets a series of profit shifting arrangements using linked company and trust structures, whether stapled or not, which are not otherwise covered by the draft framework privatisation carve out in the TA. Refer to EY s Tax Alert on the TA for more details. The ATO s framework is relevant not just for infrastructure sponsors and bankers but also for broader investors including larger super funds and financial institutions. The draft framework requires analysis by potentially impacted groups: it will impact risk management and tax governance processes, as well as possibly requiring responses.

2 EY Point of View While the draft framework s stated aim of providing taxpayers with certainty is welcome, the ATO is also going further by attempting to establish a prescriptive norm for the structuring of covered transactions and tax outcomes that, if successful, would only become more entrenched over time. This ATO approach may prove problematic, for reasons including: Where the norms are established and justified on the basis that they will ensure that an appropriate amount of tax is collected rather than on a reasoned application of the tax law, it risks ATO overreach and creating more uncertainty rather than less Taxpayers risk losing any potential certainty and face the threat of an application of Part IVA to the entire structure as soon as they introduce structural variations or pose alternative tax treatments - particularly where the result is an overall more advantageous tax outcome As the ATO is not bound by the framework there is a risk that the ATO will do a u-turn or identify other concerns with structures in due course, leaving the taxpayer exposed There are a number of instances where the ATO s position in the draft framework represents a u- turn, conflicts with long established industry practice or is difficult to support from a plain reading of the relevant tax law, including: The ATO now considers that pre construction grants or grants to mere holding companies are assessable on receipt rather than being subject to the assessable recoupment rules. This is a potentially significant change affecting renewables projects, including a range of projects in train, and may warrant legislative reform The treatment of gifted assets in the context of the utilities sector A more draconian approach to the determination of control (for Division 6C trading trust purposes but also relevant for managed investment trust (MIT) and thin capitalisation purposes) Approaching the valuation of entities within a stapled structure on the basis that they comprise a single unified business and consequential impacts on pricing of cross staple arrangements rather than respecting the separate legal status of the entities and analysing/pricing the risks and functions of each legal entity A rejection of the application of the choice principle in the context of structure formation These are substantial considerations for long term infrastructure investors. Due to the untested nature of a number of the technical views expressed by the ATO and the alternative arguments that are posed by investors seeking to implement relevant structures of this nature, a large degree of uncertainty remains. In this regard, there is therefore doubt as to whether the publication of this document will have any significant practical effect in the absence of future legislative change or judicial interpretation of the existing legislative framework. The application of the general anti-avoidance rule in Part IVA is a pervasive theme throughout the document. Whilst for certain examples provided, Part IVA would appear to be a relevant consideration, the application of Part IVA will always ultimately depend upon the facts and circumstances in each case. For example, the use of a stapled trust to hold land assets, even of a type which would not typically be separated from the operating business, could be driven by a number of dominant commercial factors, including financing costs, access to and repatriation of capital, future divestment plans and asset protection. The draft framework is not yet available on the ATO website (please note that the 2017 draft covers a much wider territory than the existing infrastructure framework materials on the ATO website, which covered the PPP elements and have not been updated - link). However, EY is able to share the 2017 draft document with interested clients for purposes of contributing to consultation. Please contact your tax client service team if you would like a copy sent to you. We welcome the opportunity to participate in further consultation with the ATO on these matters. We summarise the various chapters below. February 2017 Page 2

3 Chapter 1 Construction of Social Infrastructure Using PPPs The securitised licence structure has long been the standard contracting structure adopted by consortia bidding for social infrastructure PPPs. Chapter 1, which focusses solely on this structure, describes the ATO s view of the key income tax and GST consequences for both project entities and equity investors. This chapter was first published on 30 October 2015 and the current version contains only minor revisions, other than the identification of specific high risk structures. Overall: The income tax and GST treatment described by the ATO is generally consistent with standard market practice Commonly used variations to the structure, including progressive securitisation and repurchase of licence receivables, are generally acceptable to the ATO Part IVA will not generally be expected to apply if taxpayers adopt the exact structure outlined in the paper. This express limitation of the non-application of Part IVA to the exact structure described in the paper is stricter wording than previously used by the ATO and is adopted to highlight ATO concerns with specific high risk variations to the standard securitised licence structure. The high risk variations, set out in detail in Chapter 4 and described later in this alert, are structures that the ATO strongly advises taxpayers against adopting under threat of Part IVA applying. The ATO expressly acknowledges that there are any number of variations to the standard structure that could well fall short of being high risk. In such circumstances the ATO expects that taxpayers would approach [the ATO] to discuss the proposed variation. This is in keeping with the ATO s proactive approach to infrastructure projects and is no-doubt well meaning. The unanswered question, however, is how any such variation will be evaluated by the ATO. Will it be the case, as is anecdotally suggested, that any variation which potentially results in a present value tax advantage as compared to the standard structure is automatically deemed high risk? Or will the ATO be willing to constructively engage with taxpayers to understand the commercial imperatives that may produce the perceived tax advantage? The minutiae of the chapter may also leave the door open to ATO challenges on certain positions, since the ATO: Does not appear to accept that the licence payments made by Project Trust are genuinely paid to secure access to the infrastructure, but will not seek to challenge this contractual characterisation if the standard structure is adopted without variation Does accept that TOFA will apply to the securitisation agreement, but it is not clear whether this is, in the ATO s view, an administrative concession, given the more definitive pronouncements on the application of TOFA to other arrangements in the structure Does not appear to believe that TOFA applies to the equalisation swap despite it being a purely financial arrangement Indicates that taxing tax deferred distributions to short term investors on disposal, rather than on receipt, is a purely administrative concession (i.e. the view in ATO ID 2011/58 (withdrawn) remains applicable). Nonetheless, the provision of detailed guidance on these complex yet well accepted structures is generally welcomed by the industry for providing greater clarity over the ATO s future approach for project arrangers, investors and financiers. Chapter 2 Privatisations into Stapled Structures Chapter 2 of the draft framework contains the ATO s guidance on the use of stapled structures in the privatisation of government businesses that are effectively land (and land improvement) based or heavily reliant on particular land holdings and related improvements. For example, this should include recent privatisations of ports, toll roads, and transmission and distribution businesses. These privatisations were explicitly excluded from consideration in the separate Taxpayer Alert TA 2017/1 on the basis that they raised distinct issues (refer to EY s Tax Alert for more details). While the ATO does not explicitly identify the issues that distinguish these privatisations from the transactions covered by the Taxpayer Alert, the relevant factors would appear to be a combination of the following: The assets in question are accepted as predominantly land or interests in land The assets have not previously been in the federal income tax system February 2017 Page 3

4 The formal privatisation processes provide the ATO with the opportunity to engage directly with the seller and bidders, provide additional guidance that is specific to the transaction, and review the proposed structures before the transaction completes. The content of this chapter is based on the ATO s engagement with sellers and bidders in more recent privatisation transactions and their reviews of earlier privatisation transactions. Therefore, much of the content will be familiar to participants in those previous transactions. The fundamental concern of the ATO with stapled structures (and specifically here in the context of a privatisation) is the perceived tax rate arbitrage considered to be achieved by splitting integrated businesses. The ATO s messaging to taxpayers is to swim between the flags set out in the chapter. The ATO will apply compliance resources to discourage entry into structures that are not of the same type, or depart from the structure set out in the chapter and/or the ATO s views on its tax treatment. While the structure reflected in the chapter is broadly consistent with the key features of a typical privatisation staple, it is a simplification that does not cover variants used for particular businesses or stakeholder requirements, e.g. to facilitate mezzanine financing. Despite saying it is prepared to engage on a transaction-bytransaction basis, consistent with our comments on Chapter 1 it is unclear the extent to which the ATO will accept commercial variations without challenge in practice, particularly where they result in a perceived tax advantage. Asset/project level issues Privatised stapled structures as a single unified business Likely the most controversial aspect of Chapter 2 is the concept that all privatised staples form a single unified business and the commercial and tax outcomes that follow as a result. To manage the perceived potential for tax rate arbitrage, the ATO has expressed certain expectations on the purchase price allocation, cross-staple rental pricing and levels of gearing based on this concept. The ATO s approach is often not reconcilable with industry accepted valuation methodologies and across different asset classes. The ATO appears to apply the concepts uniformly across all privatisations without differentiation between sectors. Linkage between purchase price allocation and rental pricing Under the single unified business approach, the ATO s starting point is determining an allocation in purchase price between (1) the lease premium paid for the long term lease of land assets and (2) other consideration paid for the acquisition of the non-land assets. The ATO acknowledges the above allocation is likely to be a difficult process owing to the codependencies between the values of the tangible and intangible assets of a privatised business. The ATO sets out a number of factors relevant to determining whether a given allocation is low risk. Absent further guidance, there will still be gaps in the way that the ATO and industry will approach the allocation issue using the single unified business approach. The ATO intends to proactively engage with prospective bidders around purchase price allocation on proposed privatisations prior to their completion. The ATO indicates it will provide to bidders in a potential privatisation what it considers to be a low risk allocation. Subject to further consultation on the relevant factors, we encourage the ATO to adopt a criterion based approach on what is a complex subject, and refrain from applying a numerical one size fits all allocation to all transactions. Approach to pricing of cross-staple lease The ATO expects a cross-staple lease to be priced on an arm s length basis taking into account the nature of the single unified businesses. The ATO refers to guidance it has separately provided in the Law Companion Guide LCG 2015/15 on non-arm s length income for the purposes of the new MIT reforms as relevant to this pricing. However the ATO then says pricing that reflects the Operating Trust as a standard service provider would not be appropriate, and its expectation is that the cross-staple lease would be priced such that the combined NPV of the entities would be allocated between them in the same proportion as the purchase price allocation. It is difficult to reconcile the ATO s position that cross-staple pricing must be arm s length with a conclusion that suggests the pricing should simply be determined to produce consistency with the purchase price allocation. Pricing reflecting a fixed starting allocation is unlikely to be arm s length for the full term of the February 2017 Page 4

5 project. Amongst other things, it ignores the fact that during the typically long term of a privatisation (e.g. 99 year lease) circumstances such as additional capital expenditure and changes in regulated revenue pricing will necessitate changes to the rental pricing to meet the prevailing business conditions as they change. On the other hand, the MIT rules clearly stipulate arm s length pricing as the pricing that is expected to be derived if the relevant parties had been dealing with each other at arm's length in relation to the scheme which does not sit well with a single unified business approach. We will continue to make submissions to the ATO that further consideration is necessary. Pricing that deviates from the ATO s approach will result in a higher compliance risk, potentially attracting scrutiny of deductibility under section 8-1, characterisation of the Asset Trust s income as rent and the application of Part IVA. Further, the ATO indicates the pricing may affect whether the Asset Trust is genuinely investing in land for the purpose of deriving rent for Division 6C and MIT purposes, such as: Rental payments being a substantial proportion of profits of the Operating Trust Operating Trust deriving little taxable income Rental income does not result in an appropriate return to Asset Trust. The above extension of the ATO s view is of real concern. The implications are far more adverse than potential loss of any non-arm s length portion of rental deductions in a given year, since it could result in Asset Trust being subject to tax as a corporate (if it also meets the requirements to be public unit trust), and an upstream MIT investor losing MIT status. Unequal gearing The ATO expects equal gearing of the Asset Trust and the Operating Trust. It appears that the ATO s concern is triggered where the Operating Trust is more highly geared than the Asset Trust: the final framework should clarify this. arise. This appears to put affected offshore pension funds at a disadvantage when compared with local complying superannuation funds who are not required to perform this tracing following legislative amendments that took effect from 1 July Cross-staple loan variation The ATO notes certain privatisation stapled structures feature a cross-staple loan from Asset Trust to Operating Trust, and indicates this could give rise to a number of issues: An excessive margin being charged An unequal level of gearing as between Asset Trust and Operating Trust Asset Trust as the lender having control over the Operating Trust for the purposes of Division 6C and the MIT rules Interest withholding tax on the cross-staple Attempting to obtain a withholding tax benefit by inappropriately apportioning expenses of the Asset Trust in determining the character of trust distributions. The ATO considers that the apportionment method will not be reasonable if it spreads Asset Trust s total expenses in proportion to its income in a way that does not differentiate between the kinds of income the expenses relate to. The ATO concern in respect of the final issue can be seen in the example of a cross-staple loan that is an on-loan of external debt at no margin. In that case, the ATO maintains that the character of the income distributed by an Asset Trust should not comprise any of the interest income from the cross-staple loan as such income should have been fully offset by the interest incurred on the external debt. On the other hand, a proportionate approach to the allocation of trust expenses would likely result in some component of the Asset Trust distribution being characterised as interest income subject to withholding tax at 10% for non-residents or 0% for certain non-resident pension funds rather than 15% (or higher if Asset Trust is not a MIT). Tracing of beneficial interests for Division 6C purposes For the purposes of determining whether a project trust is a public unit trust under Division 6C, the ATO will not accept tracing is limited to unitholders that have a beneficial interest in the underlying trust property. Taxpayers are encouraged to approach the ATO to discuss specific cases e.g. offshore pension schemes where the above may February 2017 Page 5

6 Investor/upstream level issues Use of unitholder debt increased ATO scrutiny The ATO has expressed concern that structures using unitholder debt could be high risk, and may seek to apply: Transfer pricing rules and the application of the arm s length principle Thin capitalisation rules and/or Part IVA. This position is contentious given the prevalence of unitholder debt in the industry, especially the indication that such use may attract Part IVA. There are also concerns regarding ATO positions taken in respect of the application of the thin capitalisation rules which do not appear to be explicitly reflected in the framework. Treatment of tax deferred distributions The ATO accepts that tax deferred distributions do not form part of a beneficiary s assessable income and instead reduce the CGT cost base of the units held by that beneficiary. The exception is where it is in substance a return on a financing instrument, although the framework does not provide guidance for identifying such situations (but may be consistent with the approach adopted for socalled financing unit trusts in IT 2512). For revenue taxpayers, tax deferred distributions may be taken into account on disposal of the units in determining the net profit. While Chapter 1 includes an example of a revenue taxpayer, we would suggest further guidance and examples be provided by the ATO on other circumstances giving rise to revenue treatment for investors. MIT status The ATO will be undertaking compliance reviews of MITs in relation to their qualifying status, and has highlighted the below areas where particular care should be taken: Whether the trust is managed investment scheme where there is only a single beneficiary A substantial proportion of the investment management activities are in substance relevantly carried out in Australia. Pre-sale structuring of land rich Asset Trust to avoid capital gains tax Part IVA risk The ATO expects symmetry in treatment between an asset as land for Division 6C and MIT purposes on the one hand, and for the purposes of the CGT exemption in Division 855. The ATO indicates a pre-sale restructure of a land rich Asset Trust that has benefited from flowthrough taxation and/or MIT withholding treatment, in order to obtain a tax benefit on exit by increasing the value of the Operating Trust (the disposal of which by a non-resident is exempt from CGT), risks the application of Part IVA. Other confirmations The ATO has also commented on various tax aspects of privatisations largely confirming industry views, specifically in relation to the following areas: Determination of who is the holder for the purposes of Division 40 depreciation The generally limited application of Division 250 Application of Division 58 to the holder Application of Division 43 and the CGT event F2 election Application of Division 57 Deductibility of stamp duty in relation to stamping of a lease. Chapter 3 Other Infrastructure Related Issues This chapter provides a summary of the ATO s views on various issues, including customer contributions, government grants, gifted assets, capitalised labour, undergrounding power lines, as well as negative control. Importantly, whilst these issues pertain to the infrastructure sector, they are also relevant to many other taxpayers and the ATO will not limit its compliance resources to the infrastructure sector. Whilst for some issues this is the first time the ATO will provide public guidance (e.g. gifted assets), for other issues the guidance is an extension of the ATO s views (e.g. negative control), or a reversal of approach at least in some sectors (e.g. government grants). The issues are summarised further below. Customer contributions Contributions, including gross-up amounts, to infrastructure network providers should generally be treated as assessable to the network provider pursuant to section 6-5. Chapter 3 does not comment on the tax treatment for an entity making the contribution. February 2017 Page 6

7 Government grants Government grants in relation to infrastructure should generally be assessable income of the recipient. Contrary to previous private rulings issued, the ATO considers that a grant should be assessable even if the grant was pre construction or the recipient was a mere holding company immediately prior to receiving the grant. This is arguably a significant change to the ATO s views and will be problematic for taxpayers, in particular for renewables projects. Gifted assets This is the first time the ATO has published any guidance in relation to gifted assets, and its position is concerning. This is particularly the case given its view on determining the arm s length value of gifted assets, which lacks any reference to general valuation principles. The ATO s views include: Gifted assets will be assessable income of the transferee, based on either construction cost or replacement cost of the asset (which will depend on the time of derivation). The ATO confirms a recipient s contribution (which can reduce the assessable amount) must be in money and does not include encumbrances or obligations on the recipient. The existence of encumbrances that may preclude an entity benefitting from the asset (eg the grant of an exclusive right of access) may mean the recipient should not be assessable on the receipt of the gifted asset. However, this may merely delay the time of derivation to when such encumbrances end, at which time the recipient would be assessable based on the asset s replacement cost. The example used is the gift of a wharf to a lessor (and landowner) by a tenant who has exclusive right to access the wharf for a period. In that instance, the lessor is assessed on the replacement value of the wharf at the time the tenant s exclusive right ends. From a contributor s perspective, the contribution is generally expected to be capital in nature and not deductible. However, the ATO gives examples of limited situations in which deductions may be available (e.g. project pools for mining / transport capital expenditure). Capitalised labour The ATO confirms its position that salaries and wages of employees involved in the construction of a capital asset should be capitalised to the cost of the relevant asset, and should align with the accounting treatment based on the accounting standards. The ATO notes that compliance resources will be applied where taxpayers adopt alternative treatments. The ATO has been active in its approach to this issue in the power and utilities sector for some time. However arguably this approach is simplistic and may not reflect accepted judicial authority. Undergrounding power lines This issue is relevant for electricity transmission and distribution entities. The focus is on whether the expenditure is deductible as a repair pursuant to section (the ATO considers it is not), and does not extend much further. Control for the purposes of Division 6C The ATO has incorporated its previous draft discussion paper on negative control into the framework, and has clarified its position, including: Maintaining that negative control constitutes control, and that more than one entity can have control. The focus remains on what constitutes control for the purposes of Division 6C and may extend to other concepts of control (for example, the associate entity definition for thin capitalisation purposes). More definitive guidance has been provided in relation to matters which may give rise to negative control, and the examples are now categorised into those that will give rise to control and those that will not. These examples are largely consistent with those matters included in the draft discussion paper. However matters that were previously dependent on materiality (for example new investment / divestment decisions) now merely fall into the category of matters that will constitute control. This is an attempt by the ATO to provide a definitive approach / more certainty but risks creating greater uncertainty. Six examples have also been included to provide further guidance, including examples as to fragmentation of control and acting in concert, as well as control of specified reserve matters. In respect of the latter, the existence of negative control over a single key matter can be enough to constitute control for Division 6C purposes in the ATO s opinion. February 2017 Page 7

8 Chapter 4 Areas of ATO Compliance Focus The ATO seeks to identify a range of structures and positions that it considers to be high risk and will be a focus of ATO compliance review activity. This chapter in large part builds from the preceding chapters in the framework document by identifying variations that taxpayers may seek to adopt from what the ATO considers to be the standard form structures. The ATO has highlighted these variations as well as their concerns associated with each one. The chapter is separated into 6 particular matters that the ATO is concerned with: 1. Abuse of PPP structures 2. Illegitimate use of Stapled Structures 3. Overshoot of land-rich privatisations into stapled structures 4. Fracturing of control interests 5. Satisfaction of the MIT requirements and 6. Interposition of a Finance Company owned by a Charitable Trust Whilst in most cases the fact that the above matters are considered to be a focus of the ATO is well known within the industry, the release of Chapter 4, along with the remainder of the framework document, will provide investors in infrastructure projects with some insights into the ATO s current views with regard to these arrangements in assessing existing and prospective investments. Notwithstanding, the contents of Chapter 4 allow investors to be aware of particular arrangements for which they can expect some form of ATO inquiry. This should alert investors to the need to ensure that they have appropriate documentation supporting any positions adopted, in particular with regard to the rationale underpinning the development of investment structures. In addition, given the ATO raises the potential for the application of the promoter penalty regime to people who may be considered to be promoting the implementation of the structures outlined in Chapter 4, it is also a useful document for advisors when involved in infrastructure transactions. Abuse of PPP structures Chapter 1 of the draft framework sets out the ATO s view with regard to a standard form PPP structure that the ATO accepts represents a low compliance risk when adopted. However, Chapter 4 highlights the following variations to a PPP structure represent a high risk: Arrangements attempting to bring forward deductions or defer income through shorter licence terms (specifically less than 20 year terms), the front ending of licence fees into earlier project years or the back ending of availability payments Arrangements attempting to disguise capital outgoings as deductible payments either through fabricating PPP structures for assets other than social infrastructure (for example payments for the rights to operate existing Government monopoly assets) or equity securitisations whereby the private equity component of the project is replaced with other funding arrangements that gives rise to deductions over the project as opposed to a capital loss at the end of the project term Arrangements established to securitise income from a trading business in order to create passive income that can be received by a Trust and distributed at a lower rate of tax. Illegitimate use of stapled structures Chapter 2 of the framework provides guidance in relation to the use of particular stapled structures with regard to privatisation transactions. The ATO is concerned with stapled structures being adopted in other privatisation contexts and asserts that it will engage with taxpayers in relation to potential privatisations on a transaction-by-transaction basis. In addition, the guidance in Chapter 4 refers to the recently released Taxpayer Alert TA 2017/1 in relation to stapled structures as the source of ATO views with regard to the risks associated with stapled structures. In particular, the ATO appears to be concerned with the use of stapled structures to separate assets and re-characterise income in various forms, from what it considers to be a single business which cannot be divided in any commercially meaningful way. Fracturing of control interests The ATO s concerns with regard to control interests builds on the discussion in Chapter 3 on the question of control in the context of Division 6C, the MIT rules and the thin capitalisation provisions. Specifically, concerns have been raised with respect to arrangements under which a single investor holds its interest in a project through two or more interposed trusts so as to argue that no single trust has a control interest. February 2017 Page 8

9 The ATO further elaborates on more complex scenarios that it will seek to review including where different types of control rights or governance arrangements are in place so as to allocate control interests in a particular manner. In these cases, an ATO review would focus on identifying whether each of the relevant trusts within the structure may still be found to have a control interest or whether there may be a relevant scheme to which Part IVA may apply. Satisfaction of the MIT requirements Whilst the MIT requirements are not particular to infrastructure projects, the ATO has identified that it is concerned with ensuring that MITs adopted for infrastructure projects do satisfy all relevant criteria, including the requirement that the trust be a managed investment scheme (as defined within the Corporations Act 2001) and that a substantial portion of investment management activities are carried out in Australia. Interposition of a finance company owned by a charitable trust The ATO has highlighted concerns with the use of Finance Companies that are owned by Charitable Trusts accessing the public offer interest withholding tax exemption where the ultimate borrower and the lender would otherwise be associates and ineligible for the exemption. How EY can help Your EY tax engagement team can assist you to analyse the draft framework and to review the potential impacts. We can assist you to contribute your views and issues as part of the ATO consultation. We can further assist with your engagement with the ATO on infrastructure and privatisation matters as necessary. February 2017 Page 9

10 EY Assurance Tax Transactions Advisory About EY For more information please contact Energy and Infrastructure Brisbane Paul Laxon Tel: paul.laxon@au.ey.com Reid Zulpo Tel: reid.zulpo@au.ey.com Sydney Richard Lambkin Tel: richard.lambkin@au.ey.com Matt Weerden Tel: matt.weerden@au.ey.com Adelaide Sean van der Linden Tel: sean.van.der.linden@au.ey.com Melbourne Bruno Dimasi Tel: bruno dimasi@au.ey.com Richard Buchanan Tel: richard.buchanan@au.ey.com Perth Katrina Piva Tel: katrina.piva@au.ey.com Canberra Todd Wills Tel: todd.wills@au.ey.com EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. About EY s Tax services Your business will only succeed if you build it on a strong foundation and grow it in a sustainable way. At EY, we believe that managing your tax obligations responsibly and proactively can make a critical difference. Our global teams of talented people bring you technical knowledge, business experience and consistency, all built on our unwavering commitment to quality service wherever you are and whatever tax services you need. We create highly networked teams that can advise on planning, compliance and reporting and help you maintain constructive tax authority relationships wherever you operate. Our technical networks across the globe can work with you to reduce inefficiencies, mitigate risk and improve opportunity. Our 45,000 tax professionals, in more than 150 countries, are committed to giving you the quality, consistency and customization you need to support your tax function. For more information, please visit Ernst & Young, Australia. All Rights Reserved. SCORE NO: AUNZ This communication provides general information which is current at the time of production. The information contained in this communication does not constitute advice and should not be relied on as such. Professional advice should be sought prior to any action being taken in reliance on any of the information. Ernst & Young disclaims all responsibility and liability (including, without limitation, for any direct or indirect or consequential costs, loss or damage or loss of profits) arising from anything done or omitted to be done by any party in reliance, whether wholly or partially, on any of the information. Any party that relies on the information does so at its own risk. Liability limited by a scheme approved under Professional Standards Legislation. February 2017 Page 10