House of Representatives

New Business Tax System (Thin Capitalisation) Bill 2001

Second Reading Speech

Mr Slipper (Parliamentary Secretary to the Minister for Finance and Administration)

I move:

That the bill be now read a second time.

On 11 November 1999 the government announced that it would ensure Australia receives its appropriate share of tax paid by multinational companies by strengthening the thin capitalisation rules. The New Business Tax System (Thin Capitalisation) Bill 2001 introduces a new thin capitalisation regime based on the recommendations of the Ralph Review of Business Taxation. It will improve the integrity and fairness of Australia's taxation system. The new thin capitalisation regime will be more effective in preventing an excessive allocation of debt for tax purposes to the Australian operations of multinationals and will help make sure that Australia obtains a fair share of tax from those who operate internationally. In relation to operations in Australia, the bill denies tax deductions for debt expenses-mainly interest-in cases where the debt funding of the operations exceeds certain levels. For banks, the tests are framed as a minimum equity capital requirement.

This bill also amends the current income tax law to change the rules on the deductibility of interest expenses for Australians investing offshore. To reduce compliance costs for small and medium enterprises, the new regime will not apply to taxpayers or groups of taxpayers claiming annual debt deductions-for example, interest expenses-of $250,000 or less. In addition, the bill will allow Australian branches of foreign companies to borrow internationally without having to pay withholding tax on the subsequent interest payments. The current thin capitalisation measures, the existing provisions dealing with the capitalisation of foreign bank branches and the existing debt creation regime will be repealed.

The new thin capitalisation regime will apply from the start of a taxpayer's first year of income beginning on or after 1 July 2001. This will accommodate taxpayers with substituted accounting periods and, together with other transitional measures in the bill, gives all taxpayers more time to comply with the new regime. As a further transitional measure, companies can elect that the current rules apply until 30 June 2004 for interests that were issued before 21 February 2001. This election is in the New Business Tax System (Debt and Equity) Bill 2001. Where that election is made, the instruments will be afforded transitional treatment in the new thin capitalisation regime. The government released exposure draft legislation in February 2001 and has consulted extensively with business in the development of these measures and is confident that the new measures strike an appropriate balance between revenue protection and facilitating commercial arrangements. Full details of the measures in this bill are contained in the explanatory memorandum. I commend the bill and present the explanatory memorandum.

Debate (on motion by Mr Griffin) adjourned.