Australia: Taxpayer entitled to interest deductions with respect to foreign related-party financing for third-party acquisition
Federal Court decision
The Federal Court on 20 March 2024 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.
The tax authority initially sought to also rely on transfer pricing arguments to deny the taxpayer the interest deductions, but apparently abandoned those arguments.
The case is: Mylan Australia Holding Pty Ltd v Commissioner of Taxation (No 2) [2024] FCA 253
The court concluded that based on the taxpayer’s facts, it was not unreasonable that the acquisition would have been funded with a mix of debt and equity. Further, arranging the funding mix such that debt fell within thin capitalization limits is not necessarily indicative of a taxpayer having a dominant purpose of avoiding tax. Instead, the facts and circumstances, with particular reference to the usual commercial practices of the group (including the usual practices in respect of funding and liquidity management), are critical in determining the requisite purpose.
For more information, contact a KPMG tax professional in Australia:
Kristie Schubert | kschubert3@kpmg.com.au
Luke Imbriano | limbriano@kpmg.com.au
Nathan Unitt | nunitt@kpmg.com.au