Australian thin capitalization tax bill flawed: CA ANZ

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Australia’s Treasury Laws Amendment (Making Multinationals Pay Their Fair Share – Integrity and Transparency) Bill 2023, which includes thin capitalization measures, is flawed in several respects, Chartered Accountants Australia & New Zealand (CA ANZ) has said.

In its submission to the Senate Economics Legislation Committee, CA ANZ said that due to certain drafting deficiencies, taxpayers will end up being treated differently, depending on their legal structures and borrowing arrangements.

CA ANZ, which represents over 134,000 members in Australia, New Zealand & overseas, submitted that taxpayers impacted by the new thin capitalization provisions continue to advocate for the retention of a “safe harbor” approach.

“They are concerned that even though their arrangements satisfy the new fixed ratio test in the tax bill, their debt deductions remain exposed to ATO transfer pricing scrutiny and disputation. Additional compliance costs are likely for transfer pricing “position papers” (example, justifying the quantum of debt) underpinning the revamped thin capitalization calculations,” it said.

It said that the tax bill fails to cater adequately for some commercial structures commonly found in certain industries (such as large property trusts and joint venture arrangements).

CA ANZ added that the failure to undertake public consultations on Subdivision 820-EAA in the tax bill – Debt deduction limitation rules for debt deduction creation (all relevant entities) – has resulted in legislation which lacks clarity and will impede commercial transactions which are not motivated by a desire to reduce tax liabilities.

“Having previously determined that debt creation rules were not necessary in Australia, what has changed to justify them now? The changes to the thin capitalization rules are likely to reduce the amount of debt deductions claimed by entities – does Australia really need the debt creation rules?,” it said.

The Australian Taxation Office will have much to do in crafting public advice and guidance to create ‘work-around’ solutions for poorly drafted legislation, CA ANZ said.