ATO raises the evidence bar for treaty claims through fiscally transparent entities

The guidance is particularly relevant for private capital and private equity investors into Australia, where limited partnerships and certain US-incorporated limited liability companies are commonly used within fund structures.

The ATO's message is clear. Where treaty benefits are claimed through an FTE, taxpayers must be able to substantiate the residency of the ultimate investors entitled to those benefits, rather than relying on the residency of an interposed fund vehicle.

Why does this matter?

An FTE is generally not taxed at the entity level in the relevant jurisdiction. Instead, profits or income are taxed in the hands of investors who hold an interest in the entity. In a treaty context, this means taxpayers may need to look through the FTE and demonstrate that the relevant ultimate investors are residents of a treaty jurisdiction and liable to tax on the income.

The practical challenge is documentation. Where a DTA claim is made by reference to the residence of underlying investors, the ATO expects taxpayers to support that claim with robust evidence. This is likely to be a particularly relevant for Australian inbound fund structures where treaty relief may be relied upon in relation to the disposal of Australian CGT assets, withholding tax outcomes or other Australian-sourced income.

For foreign funds exiting Australian investments, this may require detailed investor‑by‑investor evidence of tax residency, including for ultimate investors throughout the investment structure. The ATO has also indicated that where sufficient documentation is not available, withholding or security arrangements may be imposed before completion of a transaction.

What evidence does the ATO expect?

The ATO expects evidence relating to the residency of interest holders in FTEs to largely comprise of primary evidence. At a minimum, taxpayers should retain and be able to produce, on request, primary evidence for each ultimate investor for which treaty relief is claimed.

The ATO expects taxpayers to maintain documentation including:

• Tax identification forms showing the investor's name, entity type and how each entity within the structure is treated under the ultimate investor's domestic tax law.
• Certificates of residency issued by the relevant foreign tax authority demonstrating the entity's residence for domestic tax law purposes.
• Additional supporting documents, where required, including incorporation documents and foreign or domestic tax returns where the primary evidence is not sufficient to substantiate residency.

Importantly, the ATO states that statutory declarations, statements under penalty of perjury or their equivalents are insufficient to substantiate residency. The guidance also confirms there is no de minimis threshold based on an ultimate investor’s holding percentage in the Australian target.

What this means for funds and investors

Fund managers and investors should review whether their existing investor onboarding and tax documentation would satisfy the ATO's evidentiary expectations.

Particular attention should be given to identifying the ultimate investors to whom FTE income is allocated and who are liable to tax as residents on that income. Where treaty benefits are expected to be relied upon, residency evidence should be maintained before Australian exits, distributions or other transactions occur.

The ATO has also encouraged early engagement where arrangements involving FTEs and treaty benefit claims are complex or material. Early discussions may help clarify evidentiary requirements and reduce the risk of issues arising during significant transactions.

Key takeaways

The guidance does not change Australia’s underlying treaty rules. However, it signals a clear expectation that treaty residency claims involving fiscally transparent structures must be supported by detailed, investor-level evidence.

For foreign funds investing into Australia, the key takeaway is to ensure documentation is maintained and accessible before it is requested by the ATO. In practice, obtaining and maintaining residency evidence for all relevant ultimate investors may require a significant uplift in existing documentation processes and governance frameworks.

We’re here to help

If you need help navigating new guidance outlining how taxpayers should substantiate treaty residency claims involving FTEs, our corporate tax team can assist funds and investors to:

• Review fund and investor documentation against the ATO’s evidence expectations.
• Prepare ultimate investor residency evidence schedules for Australian investments.
• Assess whether treaty benefits are available and appropriately supported by existing documentation.
• Support early engagement with the ATO where greater certainty is required.

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