Australia: Tax authority statement regarding Federal Court decision that taxpayer entitled to interest deductions with respect to foreign related-party financing

Statement summarizes tax authority’s views on the decision

The Commissioner of Taxation on February 28, 2025, issued a regarding the Federal Court’s decision in (March 20, 2024), in which the court held that the general anti-avoidance provisions (i.e., Part IVA of the Income Tax Assessment Act 1936) did not apply to deny the taxpayer interest deductions with respect to foreign related-party financing for the acquisition of a third party generic pharmaceutical business. Read TaxNewsFlash

The statement summarizes the Commissioner's views on the decision, including the following points:

The decision does not disturb the Commissioner's view that, depending on the relevant facts and circumstances, Part IVA may apply to “debt push-down�� schemes.
The Commissioner’s abandoning its transfer pricing arguments in the case does not preclude it from pursuing a case that an interest rate is excessive as part of a case under Part IVA. The Commissioner “will consider on a case-by-case basis whether to pursue either, or both, a transfer pricing case and Part IVA case in challenging a debt push-down scheme. The considerations relevant to the application of the transfer pricing provisions in Subdivision 815-B of the Income Tax Assessment Act 1997 are economically based and invite different considerations to the analysis demanded by Part IVA.��
The scheme in the decision pre-dates the introduction of ITAA 1936 s 177CB and was therefore determined under the “old�� Part IVA. The “new�� Part IVA, ITAA 1936 s 177CB(4)(b) requires the court to disregard the Australian tax implications of a counterfactual when determining the reasonableness of that counterfactual.
The fact that a particular commercial transaction is chosen from a number of alternative courses of action because of the tax benefit associated with its adoption will not in and of itself mandate a finding of a dominant tax purpose. Rather whether a dominant tax purpose exists requires a close and careful examination of the facts.

For more information, contact a ��㣨Leyu�� tax professional in Australia:

Kristie Schubert | kschubert3@kpmg.com.au

Julian Humphrey | jrhumphrey@kpmg.com.au

Stacey Hannam | shannam@kpmg.com.au

Keith Swan | keithswan@kpmg.com.au

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