Global Tax Alert | 27 August 2013
Australian Federal Court grants summary judgment against taxpayer in LILO financing structure based on GAAR
In a case that should be of key interest to parties involved in cross-border asset leasing, Australia's Federal Court has granted the Commissioner's application for summary judgment against a taxpayer in Deputy Commissioner of Taxation v Songa Offshore Pte Ltd  FCA 839 for a debt of over A$38.5m (including interest and late payment charges). This is notwithstanding that the taxpayer's objection against the relevant amended assessment has yet to be dealt with by the Commissioner. The substantive matter related to an amended assessment issued to the taxpayer for the year ended 31 December 2009 in relation to a lease in, lease out (LILO) financing structure of “mobile offshore drilling units in Australia” via a foreign intermediary resident in a jurisdiction that has a tax treaty with Australia. The Commissioner has contended that Australia's general anti-avoidance rules, Part IVA, should apply to the LILO structure, as if it had effect to eliminate otherwise taxable royalty payments, being payments related to the use of the equipment.
The case highlights what appears to be a concerted exercise of the Australian Taxation Office (ATO) to review the tax effectiveness of LILO structures into Australia. These actions are equally important under the revised Part IVA provisions applicable to transactions entered into from 16 November 2012.
The ATO has previously released Taxation Ruling TR 2007/11 which provides the ATO's view on the taxation implications associated with various types of inbound LILO structures involving countries with which Australia does and does not have tax treaty. Subject to the specific factors of the LILO arrangement, this ruling confirms that the use of an intermediary resident in a favorable tax treaty jurisdiction as opposed to directly leasing into Australia from a non-favorable treaty or non-tax treaty country can result in an advantageous tax outcome (e.g., no requirement to pay withholding tax on the lease payments made to a nonresident entity under the LILO arrangement).
Under Part IVA of the ITAA 1936, however, a taxpayer cannot enter into a scheme which results in a tax benefit where the sole or dominant purpose of entering into the scheme was to obtain that tax benefit.
Given the ATO's willingness to challenge this particular case from a Part IVA perspective, taxpayers that have in place or are considering LILO structures to lease substantial equipment into Australia as well as taxpayers who make lease payments out of Australia (and potentially subject to a gross up clause for Australian taxes required to be withheld), review the details of the LILO structures with their local Australian tax advisors. Particular regard should be made to:
- • Whether the structure in place results in a favorable Australian tax outcome which would not be available under another commercially reasonable alternative (ignoring the Australian tax outcomes);
- • And if so, review the commercial rationale and in particular the economic and commercial substance of the use of a foreign intermediary for an inbound leasing structure into Australia.
Taxpayers with inbound leasing structures in place should expect detailed questions from the ATO that are likely to focus on the economic and commercial substance of the inbound leasing structures. Accordingly, taxpayers should clearly document their tax positions in regards to these inbound structures and be sufficiently prepared for future ATO reviews in this area.
Future Alerts will cover developments in relation to this case and the outcomes of the taxpayer's objection in respect to the ATO's amended assessment.
For additional information with respect to this Alert, please contact the following:
Ernst & Young (Australia), Sydney
- • Daryn Moore
+61 2 9248 5538
- • Howard Adams
+61 2 9248 5601
Ernst & Young (Australia), Perth
- • Craig Robson
+61 8 9429 2271
- • Martin Caplice
+61 8 9429 2246
- • Mathew Chamberlain
+61 8 9429 2368
Young (Australia), Brisbane
- • Michael Chang
+61 7 3011 3126
Ernst & Young LLP, Australian Tax Desk, New York
- • Michael Anderson
+1 212 773 5280
EYG no. CM3761