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At a glance
- Draft Practical Compliance Guideline with comments due by 8 November 2024.
- ATO compliance approach to reviewing taxpayers that have restructured their arrangements in response to the new debt deduction creation rules (DDCR).
- Specific DDCR anti avoidance rule or the general anti-avoidance rule in Part IVA may be applied to cancel all or part of a tax benefit.
- Four colour coded risk assessment framework for determining level of compliance scrutiny, based on low and high-risk factors.
- General guidance and examples of operation of rules.
- Further ATO guidance in relation to thin capitalisation planned.
- How EY can help.
The Australian Taxation Office (ATO) has issued a draft Practical Compliance Guideline (draft PCG 2024/D3 , on 9 October 2024, here) to set out their compliance approach to reviewing taxpayers that have restructured their arrangements in response to the new debt deduction creation rules (DDCR) (see our previous Global Tax Alert for a further summary of the rules here), including for the potential application of the general anti-avoidance rule in Part IVA of the Income Tax Assessment Act 1936 and the DDCR specific anti-avoidance rules.
The draft PCG outlines the ATO’s compliance approach with a series of low and high-risk factors and a four colour coded risk assessment framework (white, yellow, green, and red zones) with varying levels of scrutiny for when they are likely to apply their resources to determine whether or not they will have cause to devote compliance resources to further examine restructures by taxpayers.
As part of this further examination the Commissioner of Taxation may seek to either apply the specific DDCR anti-avoidance rule or Part IVA to cancel all or part of a tax benefit where a taxpayer is considered to have restructured to avoid the application of the DDCR in a manner which preserves tax benefits going forward.
There are eight examples of low risk or high-risk restructures. Low-risk restructures include repaying the debt interest, disposing of foreign assets, and terminating swaps, provided they meet certain criteria. High-risk restructures involve arrangements where debt deductions are expected to be disallowed and similar deductions are claimed under restructured arrangements.
When finalised, the PCG will apply to restructures entered into on or after 22 June 2023 (the date the Act was introduced as a Bill into Parliament). The ATO may update their guidance as their engagement with affected taxpayers and their compliance activity increases throughout the implementation of the new thin capitalisation rules and DDCR.
The draft PCG is open for comments until 8 November 2024.
Given the necessary limited coverage of possible scenarios where the DDCR may apply and for which the ATO may or may not conduct compliance activities and also the lack of technical analysis and guidance, some taxpayers will need to consider how they will obtain comfort for whether the rules including the anti-avoidance rules apply, with options including to seek a private binding ruling from the ATO on their circumstances.