The safe harbour debt to equity ratio has been cut from 3:1 to 1.5:1, reducing the allowable debt for a company from 75% to 60% of an entity’s Australian assets.
The change means multinationals will have to consider the impact the change will have on claiming tax relief on interest expenses. The changes to the thin capitalisation rules will apply to income years commencing on or after July 1 2014.
“As a result of the changes, foreign investors will need to reassess their debt levels and may need to reduce them to fit within the new safe harbour going forward,” said Reynah Tang of Corrs.
The principal asset test for the taxation of foreign resident capital gains will also be amended. Entities will no longer be able to use transactions between members of the same consolidated group to create and duplicate assets.
Mining, quarrying or prospecting information and goodwill will also be valued together with the mining rights to which they relate.
A 10% withholding tax on certain gains derived from the disposal of certain taxable Australian property by foreign residents will be introduced from July 1 2016.
Consolidation regime changes
Non-residents will no longer be able to buy and sell assets between consolidated groups. This is so the same ultimate owner cannot claim double deductions; certain deductible liabilities are not taken into account twice and consolidated groups cannot access double deductions by shifting the value of assets between entities. These changes will apply from July 1 2014.
Only net gains and losses will be recognised for tax purposes for certain intra-group liabilities and assets that are subject to the taxation of financial arrangements regime, when a member exits a consolidated group.
This amendment will apply to all income tax returns and requests for amended assessments lodged from the date of the budget’s announcement.
Treasurer Wayne Swan also announced an extra A$109.1 million (US$108.3) would be given to the Australian Taxation Office (ATO) over four years. This will be invested in extra staffing to look at business restructuring that facilitates profit shifting opportunities.
Tang said the release of a Treasury scoping paper on BEPS in June 2013 and the government’s agitation for change through their leadership of the G20 in 2014 also made the budget unfriendly for foreign investors.
“Where foreign investors have a choice as to investment location, these changes might make them think twice about investing in Australia.”
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