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Australia: Thin capitalisation and other international tax changes

28 January 2014

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Tom Seymour
As previously reported, the government has announced its position in relation to a range of international tax measures that had been announced by the previous government but not yet legislated.

This includes the proposal to tighten the thin capitalisation regime with effect from income years commencing on or after July 1 2014, and includes changes to:

  • Reduce the safe harbour debt limit for general entities from 3:1 to 1.5:1 on a debt to equity basis;
  • Reduce the safe harbour debt limit for non-bank financial entities from 20:1 to 15:1 on a debt to equity basis;
  • Increase the safe harbour minimum capital for banks from 4% to 6% of the risk weighted assets of their Australian operations;
  • Reduce the worldwide gearing ratio from 120% to 100% and making it available to inbound investors; and
  • Increase the de minimis threshold from $250,000 to $2 million of debt deductions.

The alternative arm's-length debt test will remain available, subject to review.

It is unlikely that there will be any transitional provisions or grandfathering for existing funding arrangements.

Taxpayers should note that capitalising debt arrangements to fall within the safe harbour debt limit may have other tax implications. For example, foreign exchange realisation, changes in the rate of tax loss utilisation for tax consolidated groups and commercial debt forgiveness.

In addition to tightening the thin capitalisation regime, the government has made the following announcements:

  • The government will not abolish the provision that enables Australian companies to claim a deduction for interest incurred in earning exempt non-portfolio dividends. Instead, it will introduce a new targeted anti-avoidance provision.
  • Changes will be made to the non-portfolio dividend exemption so that it only applies to instruments that are equity in substance.
  • The non-resident capital gains tax (CGT) provisions will be amended which may result in certain shares held by non-residents now falling within the Australian tax net (applicable to CGT events occurring after May 14 2013).
  • A non-final non-resident withholding tax regime will be introduced (from July 1 2016) under which purchasers will be required to withhold and remit to the Australian Taxation Office 10% of the purchase price of certain taxable Australian property acquired from non-resident vendors.
  • Disappointingly, the government will not proceed with the modernisation of the controlled foreign company provisions.

Tom Seymour (tom.seymour@au.pwc.com)
PwC Australia
Tel: +61 (7) 3257 8623





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