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).
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.