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For overseas property developers investing in Australia, early funding decisions can have a material impact on tax outcomes, deductibility and overall returns. Where debt, equity and related party funding are treated differently under Australian tax rules, the structure chosen at the outset matters.
Funding is often approached with a preferred structure in mind, but Australian tax rules don’t always align with those assumptions. Classification, deductibility and cross-border considerations can interact in ways that are not immediately obvious – particularly as recent reforms place greater scrutiny on how arrangements are designed and supported.
Anika Reside, National Head of Real Estate and Construction, and George Sinanis, Corporate Tax Partner, examine the practical implications of these issues and the key considerations for overseas developers when approaching funding decisions in Australia.
Key themes
1. Funding classification matters
Overseas property developers typically fund Australian projects through equity, debt or a combination of both. Under Australian tax rules, however, the treatment of a funding instrument depends on its substance rather than the label attached to it, making classification an important issue from the outset.
2. The tax trade-offs of equity and debt
Once a funding arrangement is treated as debt or equity, the tax implications can differ significantly. Equity funding will generally give rise to dividend returns, while debt funding can support interest deductibility, but the withholding tax treatment and overall tax outcome for investors may differ.
3. Interest deductibility is not a given
Debt has often been viewed as the more tax-effective funding option, but Australia’s thin capitalisation changes have made that position harder to rely on. For property developers, particularly in the early stages of a development, earnings-based limits can restrict deductions even where borrowing is commercially justified.
4. Related party funding under greater scrutiny
Related party funding introduces another layer of complexity. New debt deduction creation rules can restrict deductions in some financing arrangements, while transfer pricing rules apply across cross-border funding more broadly. Together, they increase the need to assess not only whether deductions are available, but whether the overall arrangement can be supported.
5. Why upfront structuring matters
Funding decisions are far easier to address at the start of a project than after a structure has been implemented. Early advice and upfront modelling can help overseas property developers test assumptions, compare options and make more informed decisions from day one.
We’re here to help
For overseas property developers, funding an Australian project requires a clear view of how tax treatment, deductibility, withholding, related party arrangements and transfer pricing requirements come together in practice.
We work with clients to assess funding options, test structures early and identify issues before they affect project outcomes. Whether you are entering the Australian market, reviewing an existing arrangement or planning your next development, we can help you navigate the tax and structuring considerations with greater confidence.
For more information, please contact:
Anika Reside
Anika is a Partner in Grant Thornton's national indirect tax team and specialises in GST and fuel tax. Anika is committed to delivering an exceptional client experience while solving complex problems.
George Sinanis
George is a highly skilled and motivated Tax Partner with over 10 years of experience including 1 year on secondment as the Taxation Manager at a large multinational organisation. George has a proven track record in providing corporate tax compliance and advisory services to a number of ASX listed companies, foreign multinationals and privately held entities in a variety of sectors including real estate and construction, telecommunications, mining, manufacturing and aviation industries.
Industry
Real Estate & Construction
Supporting the sector as it navigates continued economic and social shifts
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