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Our Advocacy work: Thin capitalisation legislation

Our Advocacy work: Thin capitalisation legislation

In June 2023, legislation containing new thin capitalisation rules from 1 July 2023 was introduced into Parliament.

Broadly, thin capitalisation applies to entities part of multinational groups that incur debt deductions (e.g. interest) of more than $2 million for an income year (on a group basis).

The new rules seek to implement the Government’s pre-election commitment to replace the current balance sheet-based tests (e.g. the 60% safe-harbour) with an earnings-based test seeking to directly limit annual debt deductions to 30% of tax earnings before interest, taxes, depreciation and amortisation (tax EBITDA).

Refer to our previous submission in response to Treasury’s August 2022 consultation paper (here) and the March 2023 exposure draft legislation (here).

The legislation contains many unwelcome changes as compared to the exposure draft legislation such as the removal of most distributions from an entity’s “tax EBITDA” which may result in substantial denials of deductions for entities who hold at a parent or “upstream” level in their structure. Further, the legislation included previously unannounced debt creation rules which are drafted extremely broadly such that they can operate to permanently deny deductions in respect of ordinary commercial transactions between associates.

The legislation has been referred to the Senate Economics Committee for report by 31 August 2023. Pitcher Partners made a comprehensive submission in response to the Senate Committee where we included suggestions to improve the rules to correct key technical issues and operate fairly for adversely affected middle market taxpayers who do not operate wholly through tax consolidated groups.

You can read our submission below.

You can find out more about our advocacy work on the website here.

This content is general commentary only and does not constitute advice. Before making any decision or taking any action in relation to the content, you should consult your professional advisor. To the maximum extent permitted by law, neither Pitcher Partners or its affiliated entities, nor any of our employees will be liable for any loss, damage, liability or claim whatsoever suffered or incurred arising directly or indirectly out of the use or reliance on the material contained in this content. Pitcher Partners is an association of independent firms. Pitcher Partners is a member of the global network of Baker Tilly International Limited, the members of which are separate and independent legal entities. Liability limited by a scheme approved under professional standards legislation.

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