In August 2022, Treasury released a consultation paper seeking feedback on the implementation of certain pre-election policies of the new Labor Government.
The consultation paper comprised three parts, with the main proposal being to amend Australia’s thin capitalisation rules from a balance sheet-based safe harbour to an earnings-based safe harbour.
This would have the effect of limiting annual net interest deductions to 30% of EBITDA from 1 July 2023.
The measure has the potential to significantly impact entities in the middle market, particularly those in the property sector where entities are highly leveraged, earnings are volatile and where long-term arrangements have been entered to prior to any proposed changes to the thin capitalisation rules.
In our response to Treasury, we made a number of recommendations on various design features of the new measure including:
- Proposing carry forward rules (so that denied deductions are not permanently lost)
- Grouping rules (to allow excess debt capacity in related entities to be utilised)
- transitional rules
- Increasing the current $2m de minis
- Limiting the application of the rules to widely-held entities (e.g. managed investment trusts)
- Introducing additional safe harbours for entities who are primarily funded through arm’s length domestic debt
- Further clarification of the arm’s length debt test.
Additionally, we also made recommendations on Part 2 of the consultation paper (relating to the limitation of deductions in respect of cross-border royalties) to ensure the measure is focused on multinational tax avoidance so as not to affect ordinary commercial arrangements.
We also made recommendations on Part 3 of the paper (relating to tax transparency) to ensure any additional compliance costs and reporting obligation are limited to multinational enterprises with a substantial presence in Australia.
You can read out submission below
You can find out more about our advocacy work on the website here.