Australian draft guidance on Principal Purpose Test

On 16 December 2019, the Australian Tax Authority (ATO) published draft guidance (draft Law Administration Practice Statement PSLA 2019/D2) dealing with the Principal Purpose Test in the Multilateral Instrument (MLI).

The MLI came into force for Australia on 1 January 2019. Therefore, the earliest the MLI may take effect for Australia is:

• for withholding taxes, on income derived on or after 1 January 2019
• for all other taxes, for income years starting on or after 1 July 2019, and
• for dispute resolution, generally on or after 1 January 2019.

The draft guidance is a useful document for taxpayers to understand how the ATO will manage matters (including information requests) that may involve a principal or main purposes test, and there are incidental comments made that touch on some technical issues.

The draft guidance will be of interest to lessors who are in receipt (either directly or indirectly) of lease payments from Australian resident lessees. The “framing questions” to determine the purpose of the transaction are of particular note, such as “Does the arrangement include the use of back-to-back or flow-through arrangements?”.

Submission comments are due by 14 February 2020.

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