SYDNEY, Australia – Meng Lee, National Tax Technical Director at Andersen, has raised concerns regarding the Senate’s proposed amendments to the thin capitalisation rules as outlined in the recent exposure draft of the Treasury Laws Amendment (Making Multinationals Pay Their Fair Share—Integrity and Transparency) Bill 2023.
The draft amendments are part of the Government’s efforts to align Australia’s tax system with OECD best practices. While Andersen acknowledges the intent to prevent base erosion and international profit shifting, the absence of a tax purpose test within the debt deduction creation rules may inadvertently target legitimate commercial transactions.
Mr Lee points out that the debt deduction creation rules can still apply to domestic arrangements, which does not align with the legislation’s main aim of addressing international concerns. “The scope of the rules remains excessively broad, potentially encompassing genuine transactions, such as internal borrowings to purchase trading stock from a related entity,” Lee explains.
Furthermore, Andersen highlights the potential retrospective application of the rules to arrangements entered before 22 June 2023, as it could lead to increased compliance costs for taxpayers, who would need to trace fund usage and asset acquisitions meticulously.
Although the exposure draft simplifies certain tests and calculations, Andersen believes it fails to rectify a fundamental issue where a third-party lender’s recourse to credit support is excessively limited, especially concerning guarantees by foreign parent companies. This restriction is likely to hinder many Australian subsidiaries of multinational groups from satisfying the third-party debt test.
Additionally, while the draft introduces sensible provisions allowing eligible trusts to transfer excess Tax EBITDA, it does not extend similar benefits to partnerships and non-consolidated companies. The narrow eligibility could disadvantage entities holding significant interests in trusts.
Mr Lee advises clients to review and potentially restructure their financial arrangements in response to these changes. “Particularly for startups or entities with significant upfront deductible expenditure, such as in infrastructure projects, the new rules could result in a substantial denial of interest deductions,” Lee cautions.
Andersen stresses the need for further refinement to ensure that the thin capitalisation rules effectively target anti-avoidance without unnecessarily burdening compliant entities. Lee concludes, “It is crucial that these rules are calibrated to avoid penalizing legitimate business activities while still achieving their intended purpose of tax integrity and transparency.”
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Andersen Australia provides specialist tax services, as well as business advisory and transaction services services, catering to multinational corporations, publicly listed companies, and significant internationally active medium-sized enterprises and private family groups. Andersen Australia is dedicated exclusively to non-audit services to prevent any potential conflicts of interest.
Contact Information:Mr Meng Lee
Director – National Tax