Unpacking Labor's thin capitalisation policy – Part I - KPMG Australia
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Unpacking Labor's thin capitalisation policy – Part I

Unpacking Labor's thin capitalisation policy – Part I

Potential changes to the thin capitalisation rules as proposed by the federal Labor Party.

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The Labor Party will change the thin capitalisation rules if they win the next federal election. Labor, which first announced the policy on 2 March 2015 (through the shadow assistant treasurer), proposes to make “changes to the arrangements for how multinational companies claim tax deductions”. Included in this statement was a costing for the “worldwide gearing ratio” of $1,650 billion from 2015/16, 2016/17 and 2017/18. Labor reiterated this proposal on 1 November 2018, but noted tightening “debt deduction loopholes used by multinational companies” will improve the Budget by $3 billion over the medium term. The explanation for the costing difference between the two announcements is unclear.

How will the thin capitalisation rules change under Labor?

In the 2015 statement, Labor proposes that companies will no longer be able to claim up to a 60 percent debt-to-equity ratio for their Australian operations. Instead, deductions will be assessed on the debt-to-equity ratio of a company’s entire global operations. This means that if a company has an average 30 percent debt-to-equity ratio across its different subsidiaries, it will only be able to claim tax deductions up to that level. In short, under Labor, the safe harbour test and the arm’s length test will be removed and the worldwide gearing test will be the only test that can apply to determine a taxpayer’s allowable debt deductions.

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