Navigating the Tax landscape: 2025 Outlook for Corporations

Foreign Resident Capital Gains Tax Regime

In May 2024, the Federal Government announced in the Budget new measures to ensure that Australia can tax capital gains made by foreign residents on assets with a close economic connection to Australian land or natural resources. This announcement was followed by the release of consultation paper by the Australian Treasury in July 2024.

The proposed measures:

1. clarify and broaden Australia’s foreign resident CGT base to ensure a range of assets with a close economic connection to real property or natural resources are expressly designated as taxable Australian property.
2. extend the testing period for the “principal asset test” to the previous 365 days before the disposal, rather than the current point in time test. This brings Australian domestic law in line with OECD guidance.
3. introduce a new notification requirement for a foreign resident vendors to notify the ATO before entering into a transaction to sell membership interests worth more than $20 million, irrespective of the underlying assets held in the structure.

Though the precise scope of these amendments is yet to be seen, no transitional relief has been announced and we expect they will have a significant impact on foreign investors.

Consultation closed in August 2024. A copy of the consultation paper can be found here.

New Thin Capitalisation laws – Release of Guidance

Moving into 2025, we expect thin capitalisation to remain a key focus of the ATO for companies with multinational dealings following the enactment of the new thin capitalisation rules on 8 April 2024 and the release of two pieces of draft guidance which are expected to be finalised in 2025. The draft guidance is comprised of:

Draft Practical Compliance Guideline PCG 2024/D3

On 4 December, the ATO released the updated PCG 2024/D3: Restructures and the new thin capitalisation and debt deduction creation rules – ATO compliance approach (Guideline) that was first published on 9 October 2024. Comments for this draft are due on 7 February 2025 and we expect the finalised guideline to be released sometime in 2025.

The Guideline sets out the ATO’s compliance approach and provides a risk assessment framework rating on the application of certain anti-avoidance provisions to restructures carried out in response to enactment of the new thin capitalisation rules.

The most significant changes in the recent update relate to the debt deduction creation rules (DDCR), which were introduced into the Act in Subdivision 820-EAA. The DDCR operates to disallow debt deductions arising on certain related party arrangements, and the Guideline details the specific arrangements to which it will apply.

A copy of the draft Guideline can be found here.

Issue of a Draft Taxation Ruling

The Commissioner issued draft taxation ruling TR 2024/D3 (the Ruling) on 4 December 2024. The Ruling sets out the Commissioner’s draft view on the application of the new qualifying third-party debt test (TPDT). These conditions must be satisfied if debt interests are to qualify for the new third party debt test which enables taxpayers to deduct interest payments in respect of genuine third-party debt while entirely disallowing debt deductions that do not meet the requisite conditions.

The Ruling breaks down each relevant subsection and paragraph to clarify aspects of the third part debt test. Key elements include examples highlighting instances when the TPDT may be available and guidance on the interpretation of key requirements, including the meaning of ‘recourse’.

Our summary of the new thin capitalisation changes and their effect on relevant taxpayers can be found in our reflection of the major corporate tax developments of 2024.

Franking Credits funded by equity raisings – Release of Guidance

Following enactment of the Treasury Laws Amendment (2023 Measures No. 1) Act 2023 in November 2023, the ATO  has released a Draft Practical Guideline PCG 2024/D4: Capital raised for the purpose of funding franked distributions - ATO compliance approach (Guideline) on the new measures that deny companies the ability to pay franked dividends where it is reasonable to conclude that the dividend was funded directly or indirectly through an equity raising. The Guideline is expected to set out the ATO’s compliance approach to the assess the risk level that a distribution is unfrankable in contexts where an equity raising has occurred.

The new law makes distributions funded by an equity raising unfrankable if:

• the distribution is not consistent with an established practice of the entity making distributions of that kind on a regular basis
• there has been an issue of equity in that entity, or another entity, and
• it is reasonable to conclude that the principal effect of issuing the equity was to fund all or part of the dividend, and any entity that issued or facilitated the issue of the equity did so for a purpose of funding all or part of the distribution.

We expect this are to a particular focus of the ATO for the foreseeable future. Taxpayers and their advisers should have specific regard to the examples included in the Guideline and assess which risk zone is most appropriate. 

Courts to determine the definition of ‘royalties’

On 31 October 2024, the Federal Court handed down its decision Oracle Corporation Australia Pty Ltd v Commissioner of Taxation (Stay Application) [2024] FCA 1262 (Oracle), denying the taxpayer a stay of proceedings in respect of its existing litigation with the Commissioner of Taxation (Commissioner).

The underlying dispute between taxpayer and the ATO is whether intercompany sublicence fees paid between the Australian and Irish corporations constitute royalties within the meaning of that term under the Australia-Ireland Double Tax Agreement. The Commissioner believes the amounts qualify as royalties, and imposed penalties of approximately $253 million on taxpayer for failing to withhold tax on payments to the Irish entity, prompting the taxpayer to appeal to the Federal Court within the 60-day time limit.

The taxpayer applied for a stay of the above-mentioned proceedings to mutual agreement procedure (MAP) to take place, which is a formal tax treaty negotiation between Australia and, in this case, Ireland. In denying the stay of proceedings, the Court held the public interest in a final appellate determination of what constitutes a ‘royalty’ for the purposes of Australia’s tax treaties outweighed the ‘powerful considerations’ that would ordinarily be in favour of granting the stay of proceedings to enable resolution under the MAP.

The Federal Court has granted leave for the taxpayer to appeal the decision, leaving the state of MAP proceedings in limbo to the extent that they overlap with domestic proceedings. 

Australia’s implementation of Domestic Minimum Tax (OECD Pillar 2)

On 26 and 27 November 2024, three Bills were passed in Parliament to implement key aspects of Pillar Two of the OECD’s Global Anti-Base Erosion (GLoBE) rules. A key measure in the Bills was the introduction of the minimum global tax rate to ensure that large multinationals have an effective tax rate of at least 15% in all jurisdictions. Under an OECD Inclusive Framework, approximately 140 countries have agreed to enact the solution to address the tax challenges of a digital economy.

The minimum effective tax rate will apply to income years commencing on or after 1 January 2024 and apply to multinational enterprises (MNEs) with consolidated revenue over €750 million (c. AUD $1.2 billion). Adoption of the rules is not unexpected and has been part of the ongoing work Australia has been undertaking since OECD’s 2015 Base Erosion and Profit Shifting project.

Broadly, imposition of the 15% global and domestic minimum tax will involve three charging rules:

• The Income Inclusion Rule which will provide Australia with the ability to collect an allocation of top-up tax where the group’s ultimate parent entity (or sometimes an intermediate entity) is located in Australia. This is expected to be effective for income years commencing on or after 1 January 2024.
• The Domestic Minimum Top-up Tax is intended to satisfy the OECD requirements by imposing tax directly on ‘Constituent Entities’ of MNEs located in Australia where the entity has an effective tax rate below 15%. This is expected to be effective for income years commencing on or after 1 January 2024.
• The Undertaxed Profits Rule which is intended to apply as a backstop if low-taxed income is not fully collected under the Income Inclusion Rule. This is expected to be effective for income years beginning on or after 1 January 2025.

The ATO has already established a dedicated team for the implementation of the GLoBE rules to develop their compliance approach and provide guidance to taxpayers and advisers.