Supplementary Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)Chapter 1 - Thin capitalisation
Summary of the amendment
Schedule 1 of the Bill was amended in the House of Representatives so that foreign partners, beneficiaries and trustees of Australian partnerships and trusts will be subject to the thin capitalisation debt to equity ratio requirement, as well as the underlying partnership or trust. This was achieved by amending the definition of 'foreign investor' so that it no longer excludes partners in partnerships, beneficiaries of trusts and trustees of trusts.
As a consequence, paragraph 159GZF(4)(b), which defines the 'foreign debt' of a 'foreign investor' will be amended to reflect the revised definition of a 'foreign investor'.
The amendment will apply from the 1997-98 income year.
Background to the amendment
Foreign partners, beneficiaries and trustees of Australian partnerships and trusts currently have the capacity to fund their Australian partnership or trust investments wholly by way of foreign related-party debt.
Schedule 1 of the Bill introduced an amendment to the definition of 'foreign investor', so that foreign partners, beneficiaries and trustees will be subject to the restriction imposed by the thin capitalisation 2:1 gearing ratio.
The amendment is a consequential amendment that ensures that the definition of 'foreign debt' for 'foreign investors' reflects the amended definition of 'foreign investor'.
Explanation of the amendment
Paragraph 159GZF(4)(b), which defines the 'foreign debt' for foreign investors, will be amended to reflect the revised definition of a 'foreign investor'.