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Chinese investment in Australian resources: Can the legal debt/equity distinction still create windfalls and impediments?


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.

Author profiles

Ian Murray
Ian is an Assistant Professor in the Faculty of Law at the University of Western Australia where he teaches in Taxation and Corporations Law and researches in the areas of Corporate Taxation and the intersection between Not-for-profit Law, Tax and Corporate Governance. He has a number of years' experience as a practitioner in relation to corporate and not-for-profit tax matters across resource taxes, income tax and stamp duty. In particular, he has been extensively involved in the taxation issues arising under native title agreements, including in relation to the benefits management structures established to hold native title payments. Ian's key current research project relates to the accumulation of income by not-for-profits. - Current at 26 February 2015
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Nolan Sharkey
Dr. Nolan Sharkey is a Barrister at Francis Burt Chambers and Winthrop Professor of Law at the University Of Western Australia. He is also Professorial Fellow at Atax, UNSW in Sydney where he was based from 2000 to 2013. At Atax he delivered Masters units in international tax, DTAs, trust taxation and developed the first unit on Chinese tax outside of China. At UWA he teaches tax while at the bar he consults and advises on taxation. Nolan is widely published in leading journals. He is an FCA and holds degrees in law, accounting, Asian studies, psychology and tax. - Current at 15 April 2015
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