Global Tax Alert | 31 January 2014

Australian Tax Authorities release draft tax determination on market and capital support payments

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On 28 January 2014, the Australian Taxation Office (ATO) released a draft tax determination (draft TD) dealing with market and capital support payments.

TD 2014/D7 is the second draft TD released by the ATO on this important issue, affecting many Australian companies with overseas affiliates. The latest version has a substantially altered view and provides administrative relief for businesses using “catch up payment” arrangements. The draft TD provides guidance when a market support payment may be deductible. Based on the technical analysis and examples provided, the ATO appears to have modified its approach in response to consultation. However, given the subjectivity inherent in how this guidance is interpreted, it will be important that taxpayers ensure that form and substance align to meet potential ATO challenges.

While the analysis has been improved when compared to the first draft TD, businesses will need to be extremely careful to ensure that their legitimate payments across international operations remain deductible. Where a payment falls within the ambit of “capital support payment” as defined in the draft TD it will be regarded as capital in nature and therefore will not be deductible under the general deduction provision, as a loss from a financial arrangement or under the black hole expenditure rule.

The payments discussed in the draft TD are quite common for many multinational Australian companies. The draft TD provides a roadmap of the pitfalls to be considered and confirms that market support arrangements have to be set up properly to ensure deductibility. In particular:

  • Economics of the arrangements must reflect a real adjustment to the price of an asset or service, not just a pre-existing obligation to make good an entity's losses or insufficient profits. Also, payments must be at arm's length having regard to the quantity or quality of the assets or services being supplied.
  • Legal terms must align with the substance and economics of the agreement: labels used by the parties are not determinative of the character of the payment.
  • Payments and their accounting treatment relate to a transaction which amounts to a payment at law rather than a mere book entry which has no effect on the legal rights or obligations of the parties.

Companies should consider a detailed review of policies and any support arrangements/agreements, particularly in relation to any potential transactions in FY14.

Comments on the draft TD can be submitted to the ATO by 28 February 2014.

For additional information with respect to this Alert, please contact the following:

Ernst & Young (Australia), Brisbane
  • John Seccombe
    +61 7 3243 3669
Ernst & Young (Australia), Melbourne
  • Peter J. Janetzki
    +61 3 8650 7525
Ernst & Young (Australia), Perth
  • Mathew Chamberlain
    +61 8 9429 2368
  • Craig Robson
    +61 8 9429 2271
Ernst & Young (Australia), Sydney
  • Daryn Moore
    +61 2 9248 5538
Ernst & Young LLP, Australian Tax Desk, New York
  • Michael Anderson
    +1 212 773 5280

EYG no. CM4147