Australia: Senate Committee report on new interest limitation and subsidiary information disclosure rules

The Senate Economics Legislation Committee on 22 September 2023 delivered its report [PDF 898 KB] on proposed legislation to amend Australia's interest limitation rules and require Australian public companies to disclose information about their subsidiaries.

The Treasury Laws Amendment (Making Multinationals Pay Their Fair Share—Integrity and Transparency) Bill 2023 was referred to the Committee by the Senate over the summer. Read TaxNewsFlash

The Committee, which was originally scheduled to provide its report by 31 August 2023 but sought an extension to 22 September 2023, has recommended that the bill be passed subject to technical amendments to the interest limitation rules. The Committee recommended that the measure requiring public companies to disclose information about their subsidiaries be passed unamended.

Regarding possible technical amendments to the interest limitation rules and the debt deduction creation rule (DDCR) in particular, Treasury and the Australian Taxation Office (ATO) made the following comments at the public hearing on 15 August 2023:

• Treasury acknowledged that the current drafting of the DDCR rules is broader in application than intended. Treasury reiterated that the intention is not to limit genuine commercial debt but rather to limit an entity's use of artificial debt to increase debt levels beyond ordinary commercial levels. As such, Treasury is considering specific carve-outs and exclusions for certain types of commercial activities. In addition, Treasury is considering changes to how these rules apply to authorized deposit taking institutions (ADIs) and financial entities.
• In response to questions regarding the need for the DDCR to address debt creation schemes, the ATO provided examples of decided cases with facts that may be covered by the DDCR such as Orica Limited v FCT [2015] FCA 1399. In addition, two factual scenarios were described by the ATO as being examples of internal reorganization transactions the ATO has seen to which the DDCR may apply.
• Treasury advised it was considering technical amendments to the fixed ratio rule and third-party debt tests. In relation to the fixed ratio rule, Treasury noted that changes are needed to ensure the EDITDA calculation can accommodate attribution managed investment trusts. For the third-party debt test, Treasury noted that clarification is required to ensure this test can apply to trusts, as well as changes to ensure the effective operation of the test for property trust structures.

The Coalition Senators also provided a dissenting report stating that although they support the intent of the legislation, they do not support the passing of the rules in their current form, and providing a number of recommendations including that:

• The start date of the new thin capitalization rules be deferred to 1 July 2024 to allow for further consultation
• The DDCR rules be removed from the bill and instead be subject to a full and comprehensive Treasury consultation process through an exposure draft bill
• Amendments be made to accommodate non-consolidated tax structures such as trusts
• The third-party debt test be removed from the bill or deferred by 12 months, maintaining the arm’s length debt test in the interim
• The bill be amended so that the proposed exemption from the associate entity test for superannuation funds also apply to other investment funds

The government has stated that it intends to undertake public consultation on any amendments to the bill, however it is not known when this consultation will occur and the consultation’s precise form.

It is worth noting that there are only a limited number of sitting weeks left in 2023—about three weeks each for the House of Representatives and Senate, with the next sittings being the House of Representatives in the week commencing 16 October 2023 and the Senate in the week commencing 23 October 2023.