Worldwide gearing test: Thin cap policy – Part II

Worldwide gearing test: Thin cap policy – Part II

Jenny Wong explores in more detail the worldwide gearing ratio under Australia’s thin capitalisation rules.

Jenny Wong

Director, Australian Tax Centre

KPMG Australia


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Following my earlier article Unpacking Labor’s thin capitalisation policy – Part I, I explore in more detail the worldwide gearing ratio under Australia’s thin capitalisation rules in this article.

When Labor announced its policy to only adopt a single test for thin capitalisation, the ‘worldwide gearing ratio’, the Australian Greens sought the Parliamentary Budget Office (PBO) costing on this proposal. The costing at the time ($1.75 billion over the 2016-17 Budget forward estimates period) was considered to be of low reliability as Australian Taxation Office (ATO) data showed very few companies had used the ‘worldwide gearing debt amount’ test to determine their debt deductions.

The PBO noted “to reliably cost this proposal would require detailed knowledge of the current tax practices of large multinationals and their likely behavioural responses to this proposal.”

The Australian Greens had requested the costing for a single thin capitalisation test (worldwide gearing test) proposal, which could also suggest if the proposal came before Parliament, they would support it.

It is not clear how the worldwide gearing test under Labor would apply. However, if we go by what’s in the current legislation, here are some things you should note.

Depending on your ‘classification’ for thin capitalisation, which broadly defines you as an Australian outbound-only entity, or as both an inbound and outbound Australian entity, a certain type of worldwide gearing test applies.

If you are purely an ‘outbound’ then the worldwide gearing test relies on a concept of ‘worldwide debt’ which requires identification of “all the debt interests issued by the entity”. You apply the debt/equity rules in the Australian tax law for all your global entities to work out whether you have worldwide debt.

If you are an inbound and outbound Australian entity then your worldwide gearing test is determined by your ‘statement worldwide debt’. Broadly this is your total liabilities, less non-debt liabilities (e.g. provisions, deferred tax liabilities) as determined in your global set of audited consolidated financial statements.

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