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Changes to thin capitalisation – updated legislation

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The Federal Government has now introduced the Treasury Laws Amendment (Making Multinationals Pay Their Fair Share—Integrity and Transparency) Bill 2023 (Bill) and Explanatory Memorandum to Parliament.

Further to our article on 28 March 2023 outlining the proposed changes to Australia’s thin capitalisation regime, the Federal Government introduced the Treasury Laws Amendment (Making Multinationals Pay Their Fair Share—Integrity and Transparency) Bill 2023 and Explanatory Memorandum to Parliament on 22 June 2023. The Bill contains significant changes to the Exposure Draft legislation released by Treasury in March 2023 (ED). 

Some of the key changes between the ED and Bill are:

  1. The denial of debt deductions in respect of debt raised to derive non-assessable non-exempt income has been removed from the Bill, however, it is likely this will be subject to a separate consultation process.
  2. A new set of provisions seeking to deny debt deductions in relation to debt raised in respect of the acquisition of assets from associates or payment or distributions to associates have been introduced.
  3. Under the proposed Fixed Ratio Test, the methodology for calculating the “tax EBITDA” has been modified in various ways such as factoring in depreciation deductions and ensuring the calculations apply to trusts and partnerships.
  4. Companies are now able to rely on the business continuity test where the continuity of ownership test is failed to carry forward denied debt deductions and trusts must satisfy a modified version of the trust loss recoupment rules.
  5. The Third Party Debt Test remains a particular area of concern for key stakeholders as requirements relating to the tax residency status of the borrower, lender’s recourse over the assets of the borrower and the application of the proceeds from the debt, remain restrictive.
  6. The conduit financing rules have been improved by providing less strict requirements on the terms of on-lending and security arrangements while specifically providing for successive conduit financing arrangements.

With the Bill proposed to have effect from 1 July 2023, there is focus from the Federal Government and key community stakeholders particularly those in the real estate, construction and private equity sectors. The focus is to ensure the legislation is precisely drafted to achieve the legislative purpose of addressing multinational tax avoidance whilst not inadvertently resulting in adverse tax outcomes for a wider portion of the Australian community.

Submissions have been called for by the Senate Economics Legislation Committee and are due on 21 July 2023. It is hoped some of the further issues that have been identified with the proposed measures will be addressed following those submissions.

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Arnold Bloch Leibler is the tax controversy sector leader in end-to-end management of taxation disputes and litigation arising from ATO compliance activities and audits. If you have identified issues or would like assistance in reviewing risks or uncertainties, please contact one of our team members below.


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