Published on 01 Dec 14
by "AUSTRALIAN TAX FORUM" JOURNAL ARTICLE
Chinese direct investment into Australia is significant due to its scale and to the relatively unique circumstance of a developed country net beneficiary and developing country net provider, of direct investment. The Australian resources sector is the main target of such investment and it is in this context that certain ‘tracking note’ hybrid instruments offer marked Australian tax benefits in relation to the stamp duties or capital gains tax (‘CGT’) that might otherwise apply to acquisitions and disposals of ordinary shares. The issue is that while the tracking notes are, in substance, equity investments and bear many similarities to ordinary shares, they are not legal form shares and the tax benefits arise because various tax provisions still turn on legal form.
Further, the tax advantages can be preserved by the use of interposed holding companies (for instance, in Hong Kong or Singapore) to route the Chinese investment. However, the use of tracking notes creates non-tax inefficiencies for the issuer and holder, increases compliance costs and uncertainty and impacts on the integrity of the Australian stamp duties and CGT provisions. Ultimately they amply demonstrate the difficulty inherent in applying established international taxation concepts to innovative instruments when different countries’ laws and double tax agreements are involved.
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