Chartered Accountants Australia and New Zealand and The Tax Institute (together the Joint Bodies) write to you as the peak professional accounting and tax practitioner bodies in Australia representing the tax profession.
The Joint Bodies welcome the opportunity to provide feedback to the Senate Economics Legislation Committee (the Senate Committee) inquiry into the Government Amendments on sheet RU100 (the Government Amendments) to Treasury Laws Amendment (Making Multinationals Pay Their Fair Share-Integrity and Transparency) Bill 2023 (the Bill).
Schedule 2 to the Bill contains changes to the thin capitalisation rules to limit an entity’s debt deductions to 30 per cent of its tax EBITDA (the fixed ratio test (FRT)) and provide two alternative thin capitalisation tests, the group ratio test and the third party debt test (TPDT). It also introduces the new debt deduction creation rules (DDCR) that seek to address the risk of excessive debt deductions for debt created in connection with an acquisition from an associate entity or distributions or payments to an associate entity.
The Government Amendments seek to amend Schedule 2 to the Bill in response to the Senate Committee report on the inquiry into the Bill that recommended that the Bill be passed subject to technical amendments.
Government Amendments
The Joint Bodies are pleased that the Government Amendments have addressed some of the concerns raised in our respective submissions to Treasury on the exposure draft Parliamentary Amendments to the Bill. These amendments include:
allowing an entity to access excess tax EBITDA in other legal entities and not just eligible unit trusts and managed investment trusts, as this ensures that common controlling investment structures can continue to be funded by investor debt;
- when applying the TPDT, a debt holder can have recourse to minor and insignificant ineligible assets such as a non-Australian asset;
- deferring the application date for the new DDCR to income years starting on or after 1 July 2024; and
- further narrowing of the scope of the DDCR by ensuring that the rules apply in relation to a defined list of payments or distributions rather than payments or distributions generally.
Nevertheless, we have ongoing concerns regarding the Bill and the Government Amendments which are, broadly:
- the application date of the thin capitalisation changes (being from 1 July 2023) (other than the DDCR) means that entities have been and will continue to be subject to the new rules for at least eight months without enacted legislation;
- at a minimum, prior year tax losses as of 1 July 2023 (i.e. the application date) should be excluded from the tax EBITDA calculation as these losses would have been calculated under the existing thin capitalisation asset-based regime;
- where a company chooses not to utilise the tax losses in a year under the FRT (for example, in cases involving stapled structures), there could potentially be a double counting of losses;
- the impact on the tax EBITDA calculation for entities that receive dividends or distributions from 10% to up to 50% controlled entities and as such cannot utilise the proposed excess tax EBIDTA;
- the removal of the DDCR from the Bill for comprehensive consultation process remains preferred;
- the DDCR still needs clear exceptions for related party debt funding for acquisitions of trading stock from an associate pair, Australian domestic debt between associate pairs, and entities that have 90%+ assets in Australia (i.e. an exclusion along the lines of the thin capitalisation exclusion under section 820-37 of the Income Tax Assessment Act 1997 (ITAA 1997));
- the TPDT does not include definitions or scope of key terms such as ‘minor or insignificant assets’ and ‘Australian assets’; and
- modifying the thin capitalisation changes to accommodate private groups (that commonly operate in the middle market).
Additionally, given the significant impact of the proposed amendments, the Joint Bodies consider that it is crucial that the Government commits to a post-implementation review.
Stakeholders have been engaged in providing timely feedback since the proposed changes were first announced. However, we recognise that the Bill once enacted may require clarifications and other technical amendments based on its operation in practice and as tax advisers start to apply the law. It would be preferable that such a post-implementation review be conducted in real time and in any case, within a year or two of the commencement of the new rules.
We have set out our submissions in more detail in the attached Appendix.