Thin capitalisation measure introduced into Parliament

Tax Alert 2023 No. 01, 22 June 2023

At a glance

• Legislation to amend the thin capitalisation provisions to align with OECD earnings-based model:
  
  • 30% of tax EBITDA
  • Group ratio test
  • Third party debt test.
• Separate transfer pricing analysis required for debt quantum prior to applying ratio based tests.
• New debt creation rules introduced that potentially have broad application.
• Changes to section 25-90 deferred.
• Application date of public Country-by-Country Reporting proposed to be deferred, with a reduction in disclosures required.

On 22 June 2023, the Australian Federal Government introduced Treasury Laws Amendment (Making Multinationals Pay Their Fair Share – Integrity and Transparency) Bill 2023 (the Bill) into Parliament, following consultation on Exposure Draft legislation.

The fixed ratio test and group ratio test are not safe harbour provisions and represent a ceiling on net debt deductions only. A transfer pricing analysis will be required to support the debt quantum, prior to applying the earnings-based ratio tests (other than third party debt with no related party guarantees or security).

Financial entities and ADIs will continue to be subject to the existing thin capitalisation rules.

The new measures will apply for income years commencing on or after 1 July 2023.

The Bill contains a number of key changes from the Exposure Draft law in the application of the three new tests.

While the changes to section 25-90 proposed in the Exposure Draft law have been deferred, the Bill unexpectedly introduces new debt creation rules, which deny deductions for interest on borrowings to either acquire assets from related parties or to fund dividends or other distributions to related parties.

Tax transparency

Public Country-by-Country Reporting

In addition, the Explanatory Memorandum contains an impact statement on the proposed public Country-by-Country Reporting (CbCR) measure. This impact statement includes an updated proposed approach that reduces the disclosures to some extent, but still goes beyond the confidential CbCR and the EU public CbCR disclosures. The Explanatory Memorandum foreshadows that the application of the proposed public CbCR measure will be postponed and that there will be further consultation.

Disclosure of subsidiaries

The Bill introduces new Corporations Act requirements for Australian public companies (listed and unlisted) to disclose information about their subsidiaries in their annual financial reports, for financial years commencing on or after 1 July 2023.

If the accounting standards require the public company to prepare financial statements in relation to a consolidated entity, the ‘consolidated entity disclosure statement’ in the company’s annual financial reports must provide the following information in relation to entities within the consolidated entity:

• The names of each entity at the end of the financial year
• Whether the entity was a body corporate, partnership or trust at the end of the financial year
• Whether at the end of the financial year, the entity was a trustee of a trust within the consolidated entity, a partner in a partnership within the consolidated entity or a participant in a joint venture within the consolidated entity
• If the entity is a body corporate, where the entity was incorporated or formed and the public company’s percentage ownership (whether directly or indirectly) of each of those entities that are body corporates at the end of the financial year
• The tax residency of each of those entities during the financial year.

Public companies that are not subject to the rule (ie. no consolidated statements) must state this in their annual financial report. There are no substantive changes from the previous Exposure Draft law to the Bill.