As part of the 2022-23 Budget, an integrity measure was announced to address risks to Australia’s domestic tax base stemming from the use of excessive debt deductions. This measure strengthens Australia’s thin capitalisation rules in line with the Organisation for Economic Cooperation and Development (OECD)’s best practice guidance.
The government has prepared exposure draft legislation giving effect to this measure, which replaces the existing asset-based thin capitalisation rules with new earnings-based rules for certain entities. Additionally, the arm’s length debt test, referred to as an external third-party debt test in the draft legislation, will be available for most entities claiming debt deductions on their external third-party debts.
A previous consultation on this initiative, along with other multinational enterprise (MNE) tax integrity and transparency proposals, was held in August and September 2022.
The government is seeking stakeholders’ views on the exposure draft legislation and accompanying explanatory material implementing this measure. Stakeholders’ views are also sought in relation to whether the legislation operates with sufficient integrity, in line with the OECD’s best practice guidance. We also seek stakeholder feedback on priority issues that would inform the ATO's administrative approach and public advice and guidance on this measure.
The government will consult on the other elements of its multinational tax integrity package as separate measures.
55 submissions were received for this consultation, including 15 confidential submissions.