Potential changes to the thin capitalisation rules as proposed by the federal Labor Party.
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.
To continue reading this article, please log on to KPMG Tax Now.
Register for KPMG Tax Now if you have not already done so.
©2021 KPMG, an Australian partnership and a member firm of the KPMG global organisation of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved. The KPMG name and logo are trademarks used under license by the independent member firms of the KPMG global organisation.
Liability limited by a scheme approved under Professional Standards Legislation.
For more detail about the structure of the KPMG global organisation please visit https://home.kpmg/governance.