Australia announces important changes to thin capitalisation rules
International Tax Review is part of the Delinian Group, Delinian Limited, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2024

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Australia announces important changes to thin capitalisation rules

Sponsored by


Jock McCormack of DLA Piper Australia reports on the forthcoming revision of the country’s thin capitalisation rules, proposals for a new anti-avoidance rule, and the expansion of double tax treaties.

On October 25 2022, as part of the Australian Federal Budget, the new Albanese government announced important initiatives to strengthen the thin capitalisation rules limiting debt-related deductions.

These initiatives principally involve replacing the safe harbour and worldwide gearing tests with an earnings-based test (30% of earnings before interest, taxes, depreciation, and amortisation, or EBITDA) and, while retaining the arm’s-length debt test as a substitute or alternative test, limiting its application to third-party unrelated debt.

Importantly, however, any debt deductions denied under the 30% EBITDA test can be carried forward and claimed for up to 15 years thereafter.

These changes will apply to income years commencing on or after July 1 2023 and no transitional or grandfathering rules will apply to existing debt arrangements.

The proposed changes would apply to multinational entities operating in Australia and any inward or outward investors, in line with the existing thin capitalisation rules. However, financial entities will continue to be subject to the existing thin capitalisation rules.

It is expected that exposure draft legislation will be available in early 2023 and that the Australian Treasury will continue to consult on key aspects of the revised thin capitalisation regime.

DLA Piper Australia expects that the A$2 million ($1.3 million) de minimis rule will be retained. However, multinational businesses are encouraged to review their debt arrangements and prepare for these intended changes to the Australian thin capitalisation rules.

Denial of deductions for certain payments or intangibles

The government proposes a new anti-avoidance rule to prevent significant global entities (with global revenues of at least A$1 billion) from claiming tax deductions for payments made directly or indirectly to related parties in relation to intangibles held in low- or no-tax jurisdictions. These jurisdictions are referenced with a tax rate of less than 15% or a tax-preferential patent box regime without sufficient economic substance.

Similarly, the new rules will apply to payments made on or after July 1 2023.

It is expected that this new anti-avoidance rule will address ‘embedded royalties’ related to payments for goods and services, including potentially related to marketing intangibles. Further consultation on the proposed rule is expected in the coming months.

Double tax treaty expansion

The government signed a new double tax treaty with Iceland on October 12 2022 that, among other things, contains various features associated with the OECD/G20 BEPS initiatives.

These features include provisions associated with:

  • Transparent entities and collective investment vehicles;

  • Permanent establishments;

  • Concessional dividend, interest, and royalty withholding taxes;

  • Limitation of benefits and treaty abuse;

  • Mutual agreement procedures, dispute resolution, and arbitration; and

  • Non-discrimination provisions.

Work continues on a significant expansion and update of several Australian double tax treaties with a view to concluding or amending 10 treaties by the end of 2023. The Albanese Government announced on 16 November 2022 that new negotiations would commence for treaties with seven countries including Bulgaria, Colombia, Croatia, Cyprus, Estonia, Latvia and Lithuania. It has also made good progress with the proposed amendments to the India–Australia treaty dealing with technical services as distinct from royalties.

more across site & bottom lb ros

More from across our site

Experts from TP tech provider Aibidia also warned ITR that companies ignoring pillar two is a ‘huge issue’ and a ‘red flag’
Hanno Berger was originally handed an eight-year sentence over an estimated $11 billion tax fraud; while in other news, France calls for minimum tax on the super-rich
Amount B is meant to increase simplicity and reduce uncertainty, but US TP specialists claim it may lead to controversy
Tax Foundation economist Alan Cole also signalled that pillar two has a 'considerable chance' of failing
The Labour Party is working hard to convince business that it will bring stability to tax policy if it wins the next UK general election. But it will be impossible to avoid creating winners and losers
Burrowes had initially been parachuted into the role last summer to navigate the fallout from the firm’s tax leaks scandal
Barbara Voskamp is bullish on hiring local talent to boost DLA Piper’s Singapore practice, and argues that ‘big four’ accountants suffer from a stifled creativity
Chris Jordan also said that nations have a duty to scrutinise the partnership structures of major firms, while, in other news, a number of tax teams expanded their benches
KPMG has exclusive access to the tool for three years in the UK, giving it an edge over ‘big four’ rivals
But the US tax agency’s advice is consistent with OECD guidance and shouldn’t surprise anyone, other experts tell ITR
Gift this article