Other ATO Developments
Taxpayer alert: cross-border pre-paid agreements
22.01.2009
A taxpayer alert has been issued in relation to an arrangement using a Prepaid Forward Purchase Agreement which attempts to reduce the assessable income of an Australian resident taxpayer (TA 2009/2).
The taxpayer alert is intended to apply to arrangements with some or all of the following features:
- a foreign resident (Foreign Sub) is a subsidiary of an Australian resident company (Aus Co);
- Foreign Sub has a pre-existing interest bearing inter-company loan (“the loan”, eg for $100) with Aus Co that currently generates an interest income stream to Aus Co (or a related party) in Australia;
- as part of a refinancing arrangement, Foreign Sub issues an interest bearing instrument (eg a Mandatory Convertible Note – “the Note”) to a foreign resident counterparty (“the Counterparty”) in consideration for a payment equivalent to the loan (ie $100);
- the Note will convert into ordinary shares in Foreign Sub at a future date (eg 5 years + 1 day);
- concurrently, the Counterparty enters into a Prepaid Forward Purchase Agreement (“the Agreement”) with Aus Co, entitling Aus Co to the transfer of the Note at a future date (eg 5 years);
- the consideration payable by Aus Co under the Agreement equals the value of the Note, discounted by the net present value of the interest income stream from the loan (eg $100 – $40);
- Foreign Sub repays the loan to Aus Co ($100);
- periodic interest coupons on the value of the Note (ie $100) are payable to the Counterparty by Foreign Sub, equaling $40 in net present value terms. These payments are not taxable in Australia;
- in 5 years, the Note will be transferred to Aus Co, at which time it will automatically convert into a fixed number of ordinary shares in Foreign Sub;
- having acquired ordinary shares in Foreign Sub, Aus Co can subsequently dispose of these ordinary shares.
From an economic perspective, the arrangement allows Aus Co to:
- receive a repayment of the loan from Foreign Sub;
- pay the purchase price for the Note; and
- retain the difference of $40, being the net present value of the income stream from the loan.
