Multinationals operating in Australia may be affected by the country’s latest budget proposals. Australia’s 2022-2023 federal budget, which was announced on October 25, 2022 by the country’s newly elected government, limits certain tax deductions for multinational enterprises involved in cross-border intellectual property arrangements, enhances tax transparency reporting requirements and makes changes to the thin capitalization rules, among other measures. These budget proposals are consistent with the government’s election commitments, and provide further details following public consultations that were launched in August 2022.

Note that Australia did not comment in the budget on international corporate tax changes to reflect the Organization for Economic Co-operation and Development’s (OECD) BEPS 2.0 measures, including a global minimum tax rate.

Thin capitalization

Australia’s budget amends the thin capitalization rules for income years beginning on or after July 1, 2023. Specifically, the budget includes measures to:

  • Introduce a 30% of earnings before interest, taxes, depreciation, and amortization (EBITDA) test to replace the existing safe harbour test
  • Introduce a new earnings-based group ratio to allow debt-related deductions up to the level of the worldwide group's net interest expense as a share of earnings (which may exceed the 30% EBITDA ratio) to replace the worldwide gearing ratio
  • Limit the Arm's Length Debt Test to an entity's external (third-party) debt.

Under the new EBITDA test, deductions denied may be carried forward up to 15 years.

Other measures affecting multinationals

Australia’s budget also proposes several measures targeted at multinationals, including to:

  • Deny deductions for payments relating to intangibles held in jurisdictions with a tax rate of less than 15% or a tax preferential patent box regime with insufficient substance
  • Enhance tax transparency reporting requirements, including public country-by-country reporting.

In addition, Australia proposes changes to the tax treatment of off-market share buybacks by listed public companies and re-affirms previous announcements to exclude digital currencies (e.g., Bitcoin) from the foreign currency tax rules. The budget also reverses a 2021 budget proposal that would have allowed taxpayers to self-assess the tax effective lives of eligible intangible depreciating assets acquired from July 1, 2023.

For more information, see the Federal Budget Analysis by KPMG’s member firm in Australia or contact your local KPMG adviser.

Information is current to October 31, 2022. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's National Tax Centre at 416.777.8500