Key Corporate Tax developments: 2024 year in review

Developments in the Top 100 & Next 1,000 Reviews

The Top 100 and Top 1,000 assurance programs continue to receive significant attention from the Australian Taxation Office (ATO). Each program assesses the largest public and multinational groups, as well as APRA regulated superannuation funds in Australia. Groups that fall within each program are continuously monitored and involve one-to-one-engagements to build a comprehensive understanding of a group’s tax affairs to establish justified trust ratings of the effectiveness of the group’s tax governance.

In its most recent annual reports, the ATO has identified thin capitalisation and related party financing, hybrid mismatches, research and development expenditure, and capital allowances as areas which receive common attention or are a particular focus. The number of taxpayers in the Top 100 that have received overall high assurance ratings currently sits at 59%, while 24% of Top 1,000 taxpayers have achieved the same rating.

Our Public Groups Tax Disputes Portal is your go-to source for more information about the ATO’s specific tax engagement programs.

Diverted Profits Tax Decisions

On 9 August 2024, the Commissioner of Taxation (Commissioner) announced he had sought special leave to appeal to the High Court the Full Federal Court’s decision in PepsiCo, Inc v Commissioner of Taxation [2024] FCAFC 86 (PepsiCo Decision). The PepsiCo Decision is the first time that diverted profits tax (DPT) has been considered and was determined in favour of the taxpayer at the Full Court level having been previously determined in favour of the Commissioner in the first instance.

To enliven DPT, the Commissioner had to prove PepsiCo and its related entity, Stokely-Van Camp (SVC):

1. were parties to a scheme
2. obtained a tax benefit in relation to that scheme, and
3. effected the scheme for a principal purpose of obtaining that tax benefit.

The Court held that the Commissioner failed on point two and therefore PepsiCo and SVC were not liable for DPT.

Given the split nature of the decision, the strong dissent by Colvin J, and the concessions by Perram and Jackman JJ that DPT would apply if an embedded royalty was present in the exclusive bottling agreements, it is unsurprising that the Commissioner has sought leave to appeal this case to the High Court. 

In the meantime, the ATO likely will continue to scrutinize arrangements involving large multinationals, with a range of other weapons in its arsenal such as Australia’s transfer pricing framework and general anti-avoidance rules.

To read about the decision in further detail, a copy of our recent article considering the Full Court decision and what it means for taxpayers can be found here.

Developments in Part IVA

In March 2024, the Full Federal Court and Federal Court handed down judgements in favour of the taxpayer in the cases of Minerva Financial Group Pty Ltd v Commissioner of Taxation [2024] FCAFC 28 (Minerva) and Mylan Australia Holding Pty Ltd v Commissioner of Taxation (No 2) [2024] FCA 253 (Mylan). Both decisions represent significant wins for the taxpayer and relate to the application of the broad general anti-avoidance regime in Part IVA of the Income Tax Assessment Act 1936 (Cth) (ITAA 1936) to corporate arrangements.

Minerva

In Minerva, the Full Federal Court departed from the Federal Court’s first instance judgement which held that improved tax outcomes resulting from the taxpayer’s stapled structure was sufficient to invoke Part IVA. The Full Court focused on the Taxpayer’s commercial intentions behind the stapled structure, which was predominantly to work towards a potential IPO. Even though this structure also reduced Australian taxes, and the IPO was not achieved, the fact that it was their primary objective was sufficient to satisfy the court that Part IVA was not applicable. The ATO did not seek leave to appeal the decision to the High Court.

Mylan

In Mylan, reinforcing the decision in Minerva, the Federal Court held that the taxpayer’s dominant purpose was the commercial rationale for the scheme and not obtaining the tax benefit that was otherwise obtained. This was especially significant given aspects of how the scheme was carried out suggested some tax motivation, however, it was not significant enough to establish it as the dominant purpose of the scheme. The ATO did not appeal the decision to the Full Federal Court.

These decisions represent significant wins for the taxpayer and reinforce the requirement that any tax benefit obtained under a relevant scheme must have been the dominant purpose of that scheme by reference to the eight statutory factors set out in section 177D of the ITAA 1936.

Thin Capitalisation Developments

2024 saw significant developments to thin capitalisation, including the establishment of the new third party debt test (TPDT), and the debt deduction creation rules (DDCR).

Third Party Debt Test

Following its announcement in the October 2022-23 Federal Budget, the Federal Government passed its changes to Australia’s thin capitalisation regime on 24 July 2024. The new TPDT applies from income years commencing on or after 1 July 2023. The TPDT is an elective test which supplements the existing earnings-based tests, and allows debt deductions attributable to genuine third party debt while entirely disallowing debt deductions that do not meet the requisite conditions.

Entities that satisfy the definition of a ‘general class investor’ and financial entities can choose to apply this test for an income year if it is made in the approved form and on time. However, some general class investors will be deemed to have made this choice if, broadly, they are an associate or obliger of a debt issuer that chooses to use the third-party test, or they enter into a cross-staple arrangement with an entity which has chosen to apply the third-party debt test.

DDCR

The DDCR disallows related party debt deductions for certain related party arrangements, specifically targeting multinational businesses – that is, businesses which operate in Australia and at least one other jurisdiction. The DDCR completely deny debt deductions incurred in relation to associate debt where an entity acquires a CGT asset or a legal or equitable obligation from an associate pair, or where an entity uses a financial arrangement to fund, or facilitate the funding of, prescribed payments or distributions to an associate pair. The DDCR apply from income years commencing on or after 1 July 2024.

Build-to-Rent

On 1 January 2025, new income tax concessions in the “build-to-rent” (BTR) housing sector come into force, incentivising investment and construction in the BTR sector by:

1. increasing the capital works deduction (depreciation) from 2.5% to 4% per year (over 25 years), and
2. reducing the final withholding tax rate on eligible fund payments from eligible managed investment trust investments from 30% to 15%.  

In addition, the new measures introduce a claw-back mechanism by way of a non-deductible “misuse tax” where a BTR development fails to comply with the requirements during the compliance period.

First announced as part of the 2023-24 Federal Budget, the final amending legislation received Royal Assent on 10 December 2024 after a comprehensive consultation process. As set out in the explanatory materials, the policy goals of the measures are to incentivise construction of new BTR developments in order to increase the supply of rentals and address an acute shortage of new rental stock in Australia. For more information, read our bulletin here.