If funds don’t agree to the tax conditions, takeover deals will be rejected by the government or indefinitely delayed.
In an unprecedented move, funds have been asked to hand over “all tax advice” from Australian accountants and lawyers, including draft versions.
The documents should include “all step plans, diagrams, agreements, financial models and documents explaining commercial rationale,” FIRB noted in the request to parties in November.
Johnson Winter and Slattery law partner David Moore, who works with offshore clients on foreign investment in Australia, said private equity funds were being asked for more transaction documents.
“Private equity are ending up with more conditions on their approvals,” he said. “We have seen recently, for private equity clients, an extra tax condition – tell us in advance before you’re looking to exit.”
Mr Moore said the time delays made it harder for private equity to get banks to agree to finance deals indefinitely because of the risk that the market cost of debt changed in the interim.
Much of the crackdown relates to the future behaviour of funds once they own an asset and eventually sell the investment.
TPG and PwC legacies
In the Myer case in 2009, a $1.5 billion profit was sent offshore before the Tax Office moved to try to seize $678 million in tax. Dr Chalmers at the time was an adviser to then-treasurer Wayne Swan.
His interest has also increased since big four consulting firm PwC misused confidential Treasury tax information to help corporate clients restructure around multinational tax laws, sources said. Dr Chalmers’ office declined requests to comment.
Now, if a foreign private equity bidder wants to be approved by the treasurer, they will be required to agree to notifying the government about any future equity or debt raisings, related-party business transactions or restructurings.
Funds are also being asked to provide details and documents for related party transactions, including services, fees and transfers of assets.
Assistant Treasury Minister Andrew Leigh, who adjudicates on some lower-value transactions, has also put more scrutiny on funds using managed investment trust structures.
Advisers said private equity funds with entities in tax havens, such as the Cayman Islands and Luxembourg, were being asked to justify why they were using these structures.
While these jurisdictions can be used to avoid or minimise tax, they can also be used for less nefarious reasons due to their more business-friendly regulations and to stream payments to underlying investors who ultimately should pay tax in their home countries, advisers said.
The Foreign Investment Review Board is asking parties for evidence that a reasonable amount of tax is paid somewhere in the world.
The Tax Office’s tax avoidance taskforce is also becoming more involved in providing risk assessments and comprehensive advice to the FIRB.
“As part of the expansion of taskforce, the ATO has established a dedicated private equity strategy team,” an ATO spokeswoman said.
“The establishment of a dedicated strategy group recognises the scale of private equity investment in Australia and the unique features and tax issues related to this segment.
“The strategy provides tailored approaches to support investment into Australia as well as bespoke compliance responses targeted at different parts of the life cycle of private equity investments.”
Malcolm Brennan, a law partner specialising in cross-border mergers and foreign investment approvals at law firm King & Wood Mallesons, said FIRB had improved turnaround times on non-sensitive applications.
“However, there remains a concern about delays in the FIRB process due to agencies which have their own jurisdiction and powers,” he said.
“Matters where there are sensitivities continue to be delayed in a way that does impact consideration by foreigners investing in Australia, including in government priorities such as renewable energy and large-scale residential developments.”
Other advisers, speaking anonymously, were more robust in their description of the new regime.
“PE is in his crosshairs,” the adviser said of Dr Chalmers. Another adviser said: “There is not a single vote lost in kicking a foreigner.”
The FIRB was established in 1976 to examine proposed foreign investments and to make recommendations to the government on these proposals.
Typically, the government considers the following five factors when assessing foreign investment proposals: national security; competition; other government policies including tax; impact on the economy and the community; and the character of the investor.
“If there is no China or national security issues, often it is the time that it takes to get through, rather than the outcome that causes people most grief,” Mr Moore said.
FIRB changes internally
Since the death of former chairman David Irvine in March 2022, FIRB has undergone internal changes.
Mr Irvine, a former top spy, was a highly active player in the bureaucracy, pushing through policy changes to put national security and critical infrastructure at the heart of foreign investment decisions.
This reflected concerns about China potentially acquiring sensitive assets.
Under new FIRB chairman Bruce Miller, critical infrastructure and personal data – including health records – remain a key area of focus for national security reasons.
Mr Miller has reverted to a more traditional part-time, non-executive chairman of FIRB, in contrast to Mr Irvine who was akin to a full-time executive director. Treasury deputy secretary Roxanne Kelly has taken a more active role in managing cases.
In August, the government flagged plans to streamline the FIRB approval process for “trusted investors” which have been previously approved for other acquisitions, such as Canadian pension funds, for assets that don’t have national security implications.
The changes are yet to be unveiled.
The doubling of FIRB application fees by Labor is another point of contention with foreign investors.
The maximum fee cap is $1.12 million, which is indexed to inflation each financial year.
The problem is the same maximum fee is paid on residential land of $40 million or more, agricultural land of more than $80 million, and multibillion-dollar M&A deals.
As a proportion of the deal size, it is very high for property developments, making bidders more reluctant to enter an auction unless they have preferred bidder status.
In theory, fees paid by unsuccessful bidders can be rolled over to future deals, but in practice these so-called “frequent flyer” points cannot always be utilised again with FIRB. One-off bidders cannot roll over the fees for future use.
Dr Chalmers appointed three new members to the FIRB in December, each for a term of five years. They are Linda Apelt, Kellie Benda and Sarah Pearson.