Stapled structures – Where to from here?


Treasury has released Exposure Draft legislation giving effect to the proposed integrity rules applying to stapled structures.

At the 2019 Financial Services Taxation Conference in February, Richard Buchanan (Partner, EY) presented the paper he produced with Katrina Piva (Director, EY) 'Stapled structures – Where to from here?'

Richard's session looked at the proposed rules, which have reach beyond stapled groups, the transitional rules, and how the proposals will apply in practice.

It also provided insights into the impact that the Exposure Draft and the March 2018 Treasury Paper has had on the infrastructure landscape, including for financiers.

Richard and Katrina's paper is excerpted in this post.

Stapled structures have been part of the Australian tax landscape for decades in the property and infrastructure sectors.

For the vast majority of that time the market had operated on the understanding that there was a high degree of revenue authority acceptance of most ‘typical’ stapled structures. Even for the largest of deals tax risk was considered manageable provided appropriate due diligence was undertaken. Importantly, this was the case notwithstanding there wasn’t a specific legislative regime covering stapled structures per se. So, what has changed and why?

This paper will provide some of that context and hopefully give the reader an insight into the now defining moments when the views of the ATO’s infrastructure cell emerged in the first chapter of its draft Infrastructure Framework Document in 2015. Those moments have now proven to be defining, because, with the benefit of hindsight, it can be seen that from that point in time, it was inevitable that Treasury would be faced with the unenviable task of reforming the taxation of stapled structures.
The scale of investment that was impacted was so large and the difference in technical views between the ATO and industry so material, that maintaining the status quo was not really tenable. The commercial and political risks associated with the uncertainty that eventuated were too great, especially considering that some of the differences in view were threatening Foreign Investment Review Board (FIRB) approval processes.

In that climate, the path that Treasury had to tread was indeed a delicate one. Managing the complexity of the law and the significance of the technical differences between the ATO’s emerging views and industry’s established views and past practices would have been quite the task itself.

However, that became an entirely more challenging exercise where there were hundreds of billions of dollars of investment in real estate and infrastructure involved, powerful domestic and foreign stakeholders advocating for their interests and very real questions of sovereign risk. To add another layer of complexity, the stapled structure reform was evolving, at a time when other established nations such as the US were undertaking large scale tax reform to, in fact, attract foreign capital investment into infrastructure.

This was not lost on Treasury. In fact, Treasury made it clear that, in undertaking its review, it intended to balance the following objectives:
  • removing the tax benefits associated with converting active business income into passive income so as to protect revenue and assist in the sustainability of the tax base;
  • ensuring Australia retains globally competitive tax settings, particularly for nationally significant infrastructure projects;
  • providing a more level playing field between domestic and foreign investors; and
  • increasing certainty for businesses and investors.
As one would expect from a reform of this significance, I have heard quite divergent views from different stakeholders as to whether the draft legislation appropriately balances those objectives.

From a personal perspective, it is very difficult for me to form a concluded view without access to all of the information that Treasury would have had through the extensive consultation process (including specifically detailed economic data and confidential submissions and discussion).


I am limited to my own personal experiences. However, one thing that would appear telling in the weight given to each of the above factors is the simple signpost that the title of the draft legislation changed through the process from the ‘Treasury Laws Amendment (Stapled Structures and Other Measures) Bill 2018’ to the ‘Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australian and Other Measures) Bill 2018’ (“the Proposed Legislation”).

Before touching on the new legislation though, I will first provide some high level commentary on our understanding of the ATO’s views under the current law as they are evolving through current audit activity. Given the time available for the presentation it will not be possible to undertake a detailed assessment of those views in this paper. However, it is hoped that this paper can provide some colour on those issues as well as allowing the reader to form a view on the extent to which the draft legislation can be successful in achieving its fourth objective of “increasing certainty for businesses and investors” (particularly bearing in mind the breadth of the issues in dispute under current law and the scope of the Proposed Legislation).

Having done that, I will then provide some commentary on the key aspects of the Proposed Legislation, including those aspects where we await further guidance. Finally, I provide some thoughts as to how industry may respond into the future.

Where to from here?

As the reader would have observed, the recent stapled structures measures do not address many of
the historical issues that are currently under audit. The question still remains as to how these issues
will ultimately be dealt with and resolved going forward.

The resolution of those past issues under current law will have a significant bearing on Australia’s attractiveness as an international investment market, as will the clarification of the uncertainties under the Proposed Legislation.

Having said that, irrespective of what happens on those issues, it stands to reason that, given the tax cost for foreign investment in infrastructure has increased, something will need to change in order for
the same level of foreign investment in Australia to continue.

Therefore, the question becomes, where to from here?

Will asset values decrease? Will competition for assets decrease?

Will there be the potential emergence of differential investors (e.g. property v operations) that would impact the level of common ownership?

Will there be an impact to the manner in which some investors invest?

Will there be a change to the governance requirements for particular investors?

Will there be an increased use of debt / restricted classes of instruments?

You can access the full paper here.

Richard Buchanan, CTA, is a partner at EY and specialises in the tax aspects of major transactions, including mergers and acquisitions, infrastructure and property projects.

He regularly provides advice through the life cycle of the transaction, including funding, structuring, due diligence, documentation negotiation and post-acquisition integration. Richard’s role in infrastructure transactions can vary from advising bidding consortiums, representing lending syndicates, advising vendors and representing equity in a consortium.

Katrina Piva is a Director in EY’s Transaction Tax group.

With more than 15 years’ experience in advising clients on transactions, with particular focus on the infrastructure, power and utilities and real estate sectors, Katrina has significant experience in advising both buy side and sell side on transactions in relation to historical due diligence and provision of tax advice on transaction structures, including upstream and bid structures.

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