Australia: Updated thin capitalisation web guidance
The ATO updated its thin capitalisation web guidance to assist entities that need to apply the new thin capitalisation rules.
July 31, 2024
Following the passage of the Treasury Laws Amendment (Making Multinationals Pay Their Fair Share-Integrity and Transparency) Act 2024, the Australian Taxation Office (ATO) updated its thin capitalisation web guidance to assist entities that need to apply the new thin capitalisation rules.
- The amendments to the thin capitalisation rules include the introduction of new earnings-based tests for “general class investors,” which will be subject to one of three new tests:
- Fixed ratio test: Limits net debt deductions to 30% of earnings before interest, taxes, depreciation, and amortisation (EBITDA) measured on a tax basis.
- Group ratio test: Based on the proportion of group net third party interest expense to group EBITDA.
- Third-party debt test: Replaces the arm’s length debt test and limits debt deductions other than those relating to third party debt interests that meet certain conditions. “Financial entities” will continue to be subject to the existing safe harbor test and worldwide gearing test, but they can opt for the new third-party debt test.
- The amendments also provide a new integrity provision (also known as “debt deduction creation rules”) that will apply to debt creation schemes. However, the following entities are excluded from the new debt deduction creation rules:
- Authorised deposit-taking institutions
- Securitisation vehicles
- Australian plantation forestry entities
The new thin capitalisation rules apply to tax assessments for income years commencing on or after July 1, 2023, while the debt deduction creation rules will apply to assessments for income years starting from July 1, 2024.