ATO outlines approach to security arrangements under private capital program

The ATO has outlined the key factors that may lead the Commissioner of Taxation to request security in relation to private capital transactions.

In a recent update, the ATO said that private capital investment carries certain risks to tax revenue throughout its investment lifecycle, from pre-acquisition through to the holding period and a future disposal.

"Where we identify a significant risk of asset dissipation in circumstances where a tax liability is likely to arise upon disposal – such as where a foreign investor disposes of their only Australian asset – we may seek to enter into security arrangements with the private capital investor," it said.

"Security arrangements involve the Commissioner of Taxation securing funds for potential future tax liabilities, particularly in circumstances where disposal proceeds would otherwise flow offshore untaxed or undertaxed."

The ATO noted that security arrangements will typically only be sought when the commissioner identifies tax at risk and is not satisfied with the proposed tax treatment prior to the transaction's completion.

The Tax Office said there are a number of key factors that may lead to a request for security from the commissioner for a private capital transaction, such as when a fund is entirely in the Australian market, and no other assets will remain onshore.

Another factor is the disposal of a significant-value asset by a fund, including critical Australian infrastructure assets.

The ATO may also request security where, under private capital ownership, an Australian investment has experienced declines in tax performance during the holding period.

Other factors include poor compliance, high-risk tax positions, and bifurcation, where Australian assets or entities are bifurcated to access concessional withholding tax rates or to avoid the investment being treated as taxable Australian property.

The ATO said early and transparent engagement remained the most effective way to avoid the need for security arrangements.

"We encourage taxpayers to work with us in good faith prior to disposal to resolve any differences in interpretation and ensure smooth transaction execution."

"We invite international private capital participants to contact us regarding any intended exit from their Australian investments as soon as these are planned."