On 25 October 2022, the government announced amendments to strengthen Australia’s thin capitalisation rules. The amendments will apply for income years commencing on or after 1 July 2023. Under the new measures, general class entities will be subject to one of 3 new tests:
1. fixed ratio test
2. group ratio test
3. third party debt test.
Financial entities and ADIs will continue to be subject to the existing thin capitalisation rules, except for the existing arm’s length debt test which will be repealed.
We focus on Australian and foreign entities that have multinational investments and whose debts exceed 60% of the net value of their Australian investments.
An entity attracts our attention if it has:
- failed to lodge the international dealings schedule when required
- reported a large amount of overseas interest expense on the tax return and has not completed the thin capitalisation section
- failed the safe harbour debt test, arm’s length debt test or worldwide gearing test (based on the international dealings schedule) and has not declared the debt deduction disallowed
- relied on the arm’s length debt test without due consideration of the Commissioner’s view in TR 2020/4 Income Tax: Thin Capitalisation – the arm's length debt test
- determined the value of its assets and liabilities inappropriately for thin capitalisation purposes
- revalued assets for thin capitalisation purposes.
For information on the arm's length debt test, see PCG 2020/7 ATO compliance approach to the arm's length debt test.Entities with multinational investments and whose debts exceed 60% of the net value of their Australian investments.