The Federal Treasurer has announced a number of proposed changes
to the Australian tax system designed to remove what are seen as
opportunities for foreign investors to transfer profits from
Australia with a consequent erosion of the corporate tax base.
While there is currently no draft amendment bill or proposed
date for tabling such a bill in Parliament, the Assistant Treasurer
announced a number of consultation arrangements with interested
parties and a Proposals Paper has been released by the Government
entitled "Addressing profit shifting through the artificial
loading of debt in Australia". This announcement is therefore
subject to the risk that most of these measures may not find their
way into law before the Government goes to the polls in the Federal
Election in September 2013. The reforms are projected for
implementation as far out as 2016.
Of particular note in the package announced in the Budget are
There was much speculation prior to the Budget that there would
be some tightening up of the thin capitalisation rules that apply
to the capitalisation of Australian businesses by foreign
interests. With these proposals the Government is challenging the
generosity of the current thin capitalisation regime and suggesting
that there is currently far too much scope for foreign investors to
shift profits offshore through the use of debt deductions. The
Government has proposed that from 1 July 2014:
for general investors, including funds managers,
sovereign funds and pension funds, the debt to equity
safe harbour will be reduced from 3:1 to 1.5:1 (ie from a maximum
of 75% debt to total assets down to 60%);
for non-bank financial entities, the
debt to equity safe harbour will be reduced from 20:1 to 15:1 (ie
from 95.24% to 93.75% debt to total assets);
for banks, the capital limit will be
increased from 4% to 6% of their risk weighted assets of the
for outbound investors, the worldwide
gearing ratio will be reduced from 120% to 100% (with an equivalent
change to the worldwide capital ratio for banks) and this
limitation will also be applied to inbound investors.
The Government has also proposed an increase in the
de minimis threshold from A$250,000 to A$2 million of debt
deductions before the thin capitalisation rules can apply. This is
designed to reduce compliance costs for small business.
The Federal Treasurer also announced that the Board of Taxation
has been asked to consider ways to improve the operation of the
arm's length test to make it easier for the thin capitalisation
rules to apply and to clarify the circumstances in which they will
apply. The Board's report is expected by December 2014.
Debt Equity Rules
The Board of Taxation has also been requested to review the debt
equity rules to consider whether they can be improved to address
any inconsistencies between the Australian tax system and those of
other countries to eliminate tax arbitrage opportunities.
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guide to the subject matter. Specialist advice should be sought
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The income tax treatment of any property lease incentive will vary, depending on the nature of the inducement provided.
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