Critical Tax Developments for Private Equity: what you need to know

There are significant tax developments underway that have the potential to materially impact transaction financing and investment structures in Australia. Private equity investors in particular can expect the Australian Taxation Office (ATO) to continue heightened compliance activity in these areas, including through the Foreign Investment Review Board (FIRB) process. 

ATO Consultation on Interest Withholding Tax Exemption

The ATO has recently completed targeted consultation on the section 128F ‘public offer’ interest withholding tax exemption. 

Section 128F provides a withholding tax exemption for interest on certain debentures and debt interests issued through a qualifying ‘public offer’. The public offer test broadly requires debt to be offered in a way that makes it genuinely available to the public or a wide cross-section of it – for example, through offers to 10 or more unrelated qualifying financial investors – rather than being privately placed with a closely held lender group or associates of the borrower. 

The ATO has observed a range of behaviours suggesting entities may be incorrectly claiming the exemption by failing to satisfy the public offer test, and this has been an area of increased focus in the last 2-3 years. This scrutiny is particularly relevant for PE backed acquisition financings that rely on syndicated or club facilities with a relatively small lender group, incremental or upsizing tranches, and amendments or refinancings that may not clearly satisfy the public offer requirements.

The consultation was limited to banking and finance industry participants and concluded in the last few weeks, with the ATO confirming that it will consider the insights gathered through the consultation and its approach to updated public advice and guidance.  The nature and form of any ATO guidance material remains unclear – if any updated guidance will be forthcoming at all – including whether it will be binding on the ATO or simply offer broad practical guardrails for taxpayers to unpick and apply. 

PE sponsors and portfolio companies that have or will look to rely on section 128F will need to be prepared for closer ATO examination of their funding structures and supporting documentation, and we’re already seeing this granular information being requested in some FIRB approval application processes.

ATO Guidance on Back-to-Back Roll-overs

For many years, the ATO has indicated that it is expecting to (imminently) publish additional guidance material on the use of ‘back to back’ capital gains tax (CGT) rollovers. An example of a back to back rollover transaction that has been a source of ATO consternation involved a business being carried on by a unit trust, which in preparation for a sale transaction, would restructure by the unitholders ‘top hatting’ the unit trust with a new company. The unitholders would then sell the shares in the new company to a buyer with some or all of the sale consideration comprising buyer equity. On a straight reading of the provisions the top hat transaction would be expected to qualify for CGT rollover relief and a second CGT rollover would be available for the subsequent sale transaction to the extent that the sellers receive shares in the buyer. 

The forthcoming guidance is expected to address both whether the substantive requirements for rollover are met and the potential application of the general anti-avoidance rules in Part IVA of the Income Tax Assessment Act 1936 to arrangements that comprise consecutive rollovers. 

The timing of the guidance was pushed back in light of the litigation involving AusNet which was ultimately resolved by the Full Court of the Federal Court in favour of the Commissioner. The ATO guidance is now expected to be published in ‘early 2026’ – though, given the number of delays we have seen in the past six years or so, it remains uncertain if and when this revised timeline will actually be met. 

Board of Taxation Thin Capitalisation Review

The Government has directed the Board of Taxation to conduct a statutory review of Australia's recent thin capitalisation reforms. These reforms, which took effect from 1 July 2023, fundamentally altered debt deductibility rules by introducing earnings based tests and replacing the previous safe harbour and arm's length debt tests. The reforms also introduced a package of new debt deduction integrity measures. 

The review will assess the operation and effectiveness of these reforms, which have significantly impacted private equity leveraged structures. In particular, PE portfolio companies are now constrained by the 30% of Tax EBITDA cap under the Fixed Ratio Test, which can materially limit interest deductions for highly leveraged or low-EBITDA businesses unless they are able to satisfy the requirements of the Third Party Debt Test which requires that lenders have recourse to Australian (and not foreign) assets, has some limitations on use of funds and denies tax deductions for related party debt.

The Board will also consider broader design issues, including the operation of the de minimis threshold and whether the new rules appropriately reflect commercial leverage and economic activity.

There are a number of known issues for PE structures, including:

• The Third Party Debt Test is practically unusable for many typical PE financing structures due to recourse, credit support and foreign asset restrictions.
• The Debt Deduction Creation Rules are broad, lack a purpose test and can permanently deny deductions on existing related-party debt.
• Tracing, monitoring and evidentiary requirements significantly increase compliance costs and complexity for PE structures.

These matters (among others) have added complexity to transactional structuring and due diligence processes for PE investments.  

The Board of Taxation issued a consultation paper in late March, calling for written submissions by mid May. 

The review is expected to take approximately 12 months from commencement, so industry should not expect changes to address these issues in the near term. Any legislative response will also require a further policy and parliamentary process.

Heightened tax scrutiny through FIRB

In March 2025, Treasury significantly overhauled the FIRB Tax Conditions framework, replacing the ‘standard’ tax conditions regularly imposed on foreign investment proposals with tailored conditions specific to particular investments and their perceived tax risk profile. 

One development of note is the inclusion of additional tax-specific questions developed by the ATO in the FIRB questionnaire. Our experience is that the ATO regularly seeks responses from investors to the additional tax questions as a matter of course. 

The ATO questions were updated in May 2025 with the revised questionnaire seeking detailed information about various matters including:

• Transaction structure: an overview of the steps involved in the transaction, funds flow in connection with transaction financing, the legal form and tax residency of ultimate investors and details of interposed entities.
• Debt and equity financing: the financing arrangements of the ultimate investors in connection with the transaction and any debt and equity arrangements of Australian entities in the holding structure.
• Offshore distributions and interest payments: the nature of offshore distributions following completion and details of applicable withholding taxes.
• Debt deductions: details of the anticipated ‘thin capitalisation’ position of the group.

A number of these questions are intricately linked to the developments discussed above.  We therefore expect the FIRB process to be fertile ground for the ATO to contemporaneously test developments as and when they arise. 

Recommended Actions

PE clients should:

• review existing and future debt offerings for section 128F compliance, with particular focus on syndicated and club financings, amendments and re-financings, and ensure there is sufficient documentation to support the public offer requirements;
• assess the impact of the 30% Tax EBITDA cap, the Third Party Debt Test and the Debt Deduction Creation Rules on current and proposed capital structures; and
• monitor and participate in the review processes throughout 2026, either directly or through industry bodies.

We are actively monitoring these developments.