Board of Taxation launches thin capitalisation review

Last Friday (30 January), the Board of Taxation (BoT) launched its scheduled review into recent changes to Australia’s thin capitalisation rules under the Treasury Laws Amendment (Making Multinationals Pay Their Fair Share—Integrity and Transparency) Act 2024.

The BoT said it would assess whether the regime was successful in addressing profit shifting risks arising from the use of excessive debt deductions. It also sought to identify minor and technical drafting changes necessary to support the practical administration of the law.

It also would consider whether the $2 million exemption threshold should operate as a net debt deduction concept, whether the default tax EBITDA calculation operates to appropriately reflect an entity’s economic activity as intended, and the practical impost the legislation has had on businesses.

Industry body CPA Australia said the BoT’s review was a “welcome step,” adding that it was necessary to address “significant gaps and uncertainties” present in the law which posed challenges to taxpayers and practitioners.

“CPA members consistently report that the recent thin capitalisation changes, combined with other integrity rules, have significantly increased complexity, compliance costs and commercial disruption,” CPA tax lead Jenny Wong said.

“Getting the balance right between integrity and complexity is essential if Australia wants a tax system that is fair, competitive and administratively sustainable – and one that does not discourage global capital investment.”

Cameron Blackwood, head of tax at Corrs Chambers Westgarth, also welcomed the review. He argued that aspects of the new thin capitalisation provisions, such as the third party debt test, had gone beyond targeted anti-avoidance and were interfering with genuine commercial transactions.

“With the debt deduction creation rules – these provisions are retrospective, wide-ranging and are causing a number of compliance and administrative issues for taxpayers that go beyond a targeted measure. Given the Government’s commitment to reducing red tape, this measure should be revisited,” he added.

In 2024, thin capitalisation reforms were introduced to curb multinational profit shifting through debt deductions. The rules were intended to prevent multinationals from excessively reducing their Australian taxable income by moving domestically-generated profits to lower tax jurisdictions using intra-group debt.

“Our thin capitalisation reforms target the excessive use of debt deductions to avoid paying tax in Australia, and are in line with the OECD’s best practice guidance,” Treasurer Jim Chalmers said in a statement regarding the BoT’s review.

“These reforms are all about ensuring multinationals pay a fairer share of tax in Australia. When multinationals exploit loopholes to pay less tax, they’re gaining an unfair advantage over local businesses.”

Following the reforms, the ATO introduced three new tests limiting the amount of debt deductions general class investors were allowed during an income year. Accounting bodies have previously called out the ATO’s proposed compliance approach to the third party debt test (TPDT) as overly restrictive and impractical.

The Board of Taxation’s review commenced on Sunday (1 February), with a final written report due within 12 months.