Thin capitalisation changes require rethink of multinational capital structuring

The Government has released draft legislation which if passed will mark significant changes to Australia’s Thin Capitalisation legislation to apply from 1 July 2023.

Key changes include:

  • Fixed ratio test (30% of tax EBITDA), to replace the former 60% of assets safe harbour
  • Group ratio test to replace worldwide gearing test
  • External 3rd party debt test to replace arm’s length debt test
  • Denial of debt deductions to finance the purchase of non-portfolio (>10%) interests in shares in foreign subsidiary companies.

The changes will align Australia’s rules closer to rules adopted by USA and the EU (and endorsed by OECD).  The changes should simplify the tests required to calculate thin capitalisation.  However, entities currently relying on the 60% of assets safe harbour debt test will be required to review and rethink their multinational debt capital structures to ensure no debt deductions are denied.  Further, project feasibility models will need to be adjusted to ensure after-tax expected cash flows are accurate.

The existing rules and proposed changes are complex therefore we urge affected entities to seek advice on how the changes will effect their debt financing outcomes prior to 1 July 2023.

Click here for a detailed summary of the proposed changes.

Mazars specialises in providing tax advice regarding international business and tax issues, advising many Australians taxpayers on such issues.   Our dedicated Infrastructure Finance team can also assist with  feasibility models forecasting the impact of the proposed changes.  For further information or assistance please contact your usual Mazars advisor or our tax specialists via the form or contact details below:

Brisbane – Jamie Towers

Melbourne – Robert James

Sydney – Lauren Hill

+61 7 3218 3900

+61 3 9252 0800

+61 2 9922 1166

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Author: Lauren Hill and Eileen Li

Published: 14/4/2023 

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