AUSTRALIA cracked down further on the use of perpetual instruments that are stapled to shares.

US companies have used such instruments to reduce the tax burden on their projects in Australia. Australia took steps in 2001 to ban them. An Australian court decided in September that the instruments did not work
even before 2001. 

One of the tools that multinational corporations use in an effort to reduce income taxes in countries where they do business is to capitalize their subsidiaries in such countries with as much debt as the local tax authorities will allow. Earnings paid out as interest on such debt are deductible, thereby reducing the
amount of income on which taxes have to be paid.

US multinationals must thread a needle. Many want not only to reduce taxes in foreign countries, but also to defer taxes in the United States. This requires keeping the earnings offshore. It also only means being careful not to capitalize their offshore subsidiaries with debt — at least not with instruments that the US views as debt. US taxes cannot be deferred on passive income like interest. Therefore, the key is to find instruments that are treated as debt for tax purposes in a country where the US multinational is doing  business, but are not debt for US tax purposes.

In Australia, the debt took the form of perpetual instruments — debt instruments that had no deadline for repayment and that had other equity features. They were also “stapled” to shares, meaning they could not be sold without also selling the shares. 

Income tax reforms adopted in mid-2001 in Australia make clear that debt instruments that cannot be sold or redeemed separately from shares will be treated as equity for tax purposes in Australia.

A federal judge ruled in September that such instruments were equity even before the 2001 tax reforms as to do otherwise would be to “take a blinkered approach.” He also said the instruments ran afoul of a  general anti-avoidance regime that allowed the tax collector to negate any transaction undertaken for the primary purpose of reducing taxes. The case is Macquarie Finance Limited v. Commissioner of Taxation.