Thin capitalisation changes
Tightening of the thin capitalisation rules is one of the Government’s key international tax integrity measures included in this year’s Budget. The thin capitalisation provisions deny interest deductions to entities where they are either foreign owned, or own a foreign entity, and the legislation deems them to be insufficiently capitalised.
In order to increase the denial of interest deductions to Australian entities, the valuation methodology relating to assets will be restricted and potential tax advantages for consolidated groups and multiple entry consolidated groups with a foreign entity will be eliminated.
Existing ATO guidance allows entities to value assets and liabilities in accordance with accounting standards, even if these disclosures are not included in the entities’ formal accounts. Consequently, entities may value assets at market value regardless of the disclosures made in the entity’s financial statements. The proposed change will ensure that assets may only be valued in accordance with the financial statement disclosures.
Currently, consolidated groups and multiple entry consolidated groups that are both controlled by a foreign entity and control a foreign entity may have access to concessional treatment available to outward investor entities. This can exclude the consolidated group from the thin capitalisation regime where the Australian asset threshold is met. By contrast, under the general thin capitalisation provisions, this concession is excluded where an entity qualifies as both an outbound and inbound investment vehicle. The announced change seeks to align the treatment of consolidated groups and multiple entry consolidated groups with those applying to other entities under the general thin capitalisation provisions.
These rules further reduce the scope for entities to gain advantages under the thin capitalisation provisions. It continues the Government’s focus on the level of Australian tax payable by multinational enterprises.