Federal Budget 2024 - How will this impact your business? Read the latest insights
The new Australian thin capitalisation legislation that passed Parliament in late March 2024 applies to relevant taxpayers from 1 July 2023.
The legislation includes three tests: the default Fixed Ratio Test, and two elective tests - the Group Ratio Test and the Third-party Debt Test. We note that the $2m debt deduction de minimus exemption remains.
In the series below we address important aspects of the legislation and provide an understanding on how this new legislation may impact your business. This includes a comparison of the previous and current criteria for claiming interest deductions. We also share our perspective on the practical implications of these new laws on businesses.
We provide an outline of the new measures compared to the previous thin capitalization provisions. This includes a summary of the three new tests being, the Fixed Ratio Test, Group Ratio Test, and the Third-party Debt Test, and when these may be used.
We explore the Fixed Ratio Test, including a practical worked example involving a capital intensive but low EBITDA industry.
We further explore the Fixed Ratio Test, which replaces the Safe Harbor Test, including any changes with Net Debt Deductions, Excess Tax EBITDA Amount, and Carried Forward Debt Deductions. We also discuss the interaction of the new thin capitalisation legislation and the transfer pricing legislation.
In this video, we review the debt creation rules that are in place to further limit excessive interest deductions. We discuss the broad arrangements and who the debt creation rules apply to. We then look at the Group Ratio Test, and the steps involved including a worked example, followed by the Third-Party Debt Test, which replaces the arm’s length debt test for general class investors.
After reviewing the legislation and the changes involved, we wrap up our series by discussing key take-aways to consider. We outline things to look-out for and recommend some next steps to tackle these new rules.
With over 30 years experience in the Australian, UK and New Zealand markets, Brett has expertise across a broad range of corporate and international taxation issues.
Christine Cornish is an accomplished Transfer Pricing specialist, with over 20 years of experience in professional services and inhouse tax teams.
Keith is a Director at Grant Thornton with over 12 years of professional experience advising clients specifically in relation to transfer pricing issues.
Jess has over 8 years working in corporate tax in both Australia and the UK. She has experienced applying similar thin capitalisation rules in the UK.
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