Australian thin capitalisation reforms delayed and subject to further review

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

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

Australian thin capitalisation reforms delayed and subject to further review

Sponsored by

Sponsored_Firms_piper.png
money-6010251.jpg

Jock McCormack of DLA Piper reports on proposed revisions to Australia’s new thin capitalisation reforms, and discusses the country’s expanding double tax treaty network.

The Australian Senate Economics Legislation Committee has secured a time extension to report on the Bill currently before Parliament which contains, amongst other things, significant reforms to Australia’s thin capitalisation rules, i.e. the Taxation Laws Amendment (Making Multinationals Pay Their Fair Share – Integrity and Transparency) Bill 2023. This Bill was introduced to the Australian Parliament on June 22 2023, and it is now expected that the Senate Committee will make several recommendations and proposed amendments relating to, amongst other things, the fixed ratio test, the third-party debt test and the debt deduction creation rules.

The new legislation proposes significant changes to Australia’s thin capitalisation rules for multinational enterprises (non-bank/non-financial entities), particularly impacting those involved in capital intensive industries like economic and social infrastructure, property and energy and natural resources.

The transition to the OECD’s earnings-based model from the existing safe harbour test and arm’s-length debt tests has raised various issues and concerns, which are the subject of various submissions by industry and professional bodies to the Senate Committee.

As currently proposed, the primary test would be the fixed ratio test where net debt deductions (i.e., interest deductions) are limited to 30% of the entity’s tax EBITDA. Alternative approaches based on a group EBITDA ratio test or the third-party debt test limit would be available in prescribed and limited circumstances.

The proposed legislation introduces an additional integrity measure that would disallow debt deductions related to debt creation schemes.

Further, since gearing levels would no longer be governed by the thin capitalisation rules for taxation purposes, the gearing levels of Australian entities (in addition to the interest rate for the debt) may also need to be reviewed from an arm’s-length perspective under Australia’s transfer pricing rules, in respect of any cross-border debt (including shareholder or unit holder loans).

Comparisons have been drawn with other countries’ approaches to specific interest limitation rules, particularly the proposed new Canadian interest limitation rules. These provide an effective carve-out from the rules (and thus do not limit the deductibility of interest and related financing expenses) that are incurred in respect of many Canadian public-private partnership infrastructure projects that utilise third-party/arm’s-length debt.

Expansion of double tax treaty network

Australia has recently announced the review and update of its double tax treaty with New Zealand, adding to the significant expansion of its treaty network, particularly in Europe.

The New Zealand treaty was last updated in 2009 and was regarded as a modern version of Australia’s contemporary double tax treaties. This treaty is also subject to the overlay of the multilateral instrument and the updated version should be a very good indicator of Australia’s evolving double tax treaty policy initiatives.

Including the New Zealand treaty review, Australia has an ambitious treaty expansion program with 14 new or updated treaties being pursued at this time, including with Greece, Portugal, Luxembourg and Columbia.

It will be important to increasingly evaluate the potential application of the proposed expanded Australian general anti-avoidance rule (Part IVA). This rule, applicable from July 1, 2024, is intended to apply to ‘reductions’ in a withholding tax liability (in addition to a nil withholding tax liability) that might be available, amongst other reasons, under an applicable double tax treaty (e.g. involving ‘treaty shopping’).

more across site & shared bottom lb ros

More from across our site

Tax expert Craig Hillier agrees with the comparison of pillar two to using a sledgehammer to crack a nut
The amount is reported to be up 57% from the £5.6bn that the UK tax agency believes was underpaid in the previous year
The US president also unveiled a new 50% levy on copper imports; in other news, a UK wealth tax proposal has been criticised by the Institute for Fiscal Studies
Wim Wuyts, who had been head of the specialist tax network since 2017, is moving on to a new role with WTS’s Belgian member firm
MNEs are increasingly using algorithmic tools in TP. Sahasranshu Dash argues that data ethics should therefore plug directly into the TP design process
The Institute of Chartered Accountants in England and Wales also queried whether HMRC resources could be better spent scrutinising larger entities
Grant Thornton’s Austria tax head likens his practice to an escape room, shares his football coaching ambitions, and explains why tax is cool
Awards
ITR is delighted to reveal all the shortlisted nominees for the 2025 EMEA Tax Awards
Awards
ITR is delighted to reveal all the shortlisted nominees for the 2025 Asia-Pacific Tax Awards
The fates of pillars one and two hang in the balance after the US successfully threw its weight around in G7 and Canadian negotiations
Gift this article