The recent changes to Australia’s thin capitalisation rules involve new earnings-based tests for certain entities, replacing the previous asset-based rules.
The aim of these changes is to align Australia’s thin capitalization rules with the best practice approach of the Organisation for Economic Cooperation and Development.
The updated rules will apply to tax assessments for income years starting on or after 1 July 2023, while the new debt deduction creation rules will apply to assessments for income years beginning on 1 July 2024.
For ‘general class investors,’ there will be three new tests:
- The fixed ratio test- Which limits net debt deductions to 30% of earnings before interest, taxes, depreciation, and amortisation (EBITDA) measured on a tax basis.
- The group ratio test- Based on the proportion of group net third-party interest expense to group (EBITDA).
- Third-party debt test-Which replaces the arm’s length debt test and limits debt deductions other than those relating to third-party debt interests that meet certain conditions.
If you are a ‘financial entity, you can continue to follow the existing safe harbour and worldwide gearing tests or choose the new third-party debt test.
Certain entities like Authorised Deposit-taking Institutions (ADIs), securitization vehicles, and Australian plantation forestry entities are exempt from the new debt deduction creation rules and will continue to follow the previous rules.
Credits
Swadhin Behura
One Business Services Team
