Australia vs. Orica Limited, December 2015 Federal Court, FCA 1399; 2015 ATC 20-547.

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The Orica case involve funding of an overseas entity or operations by an Australian entity, where the funds are subsequently provided back to the Australian entity or its Australian associate in a manner which purportedly generates Australian tax deductions while not generating corresponding Australian assessable income (Free dip).

The arrangements essentially involve the “round robin” movement of funds where an entity claims income tax deductions in Australia for costs of borrowing or obtaining other financial benefits (including satisfaction of liabilities) from an overseas party the loan or other financial benefit provided by the overseas party is in substance funded, directly or indirectly, by an investment by the entity claiming the deductions or its Australian associate the return on the Australian investment, reflecting the financing costs payable to the overseas party, comes back to Australia in a non-taxable or concessionally taxed form, for example, as a distribution from an overseas subsidiary which is not assessable under Subdivision 768-A of the Income Tax Assessment Act 1997 (ITAA 1997).

Similar arrangements may display some or all of the following features:

  • the entity claiming the Australian tax deductions is related to the overseas party providing the loan or other financial benefit
  • the overseas party is an entity resident in a low tax jurisdiction, or is otherwise not taxable in the overseas country on any financing costs payable by the entity claiming the deductions, for example, because it can claim foreign tax credits or tax losses in the overseas country
  • use of hybrid entities or instruments such that: i. the financing costs payable to the overseas party which are deducted in Australia are not taxable in the relevant overseas jurisdiction, or ii. the financing costs are deducted twice, i.e. once in Australia and once by the hybrid entity or the hybrid entity’s owners in the overseas jurisdiction
  • the financing costs payable to the overseas party is not income taxable in Australia under Australia’s controlled foreign company (CFC) provisions
  • the non-assessable foreign sourced income distributed to the Australian entity increases its ‘conduit foreign income’ balance so it can distribute unfranked dividends funded from its Australian profits to its foreign shareholders free of dividend withholding tax
  • there is no cash transfer of relevant funds and relevant steps are said to be carried out by journal entries
  • the arrangement produces a commercial outcome or achieves an overall advantage to the global group because of the Australian tax benefits.



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