CPA pushes for targeted changes to 'complex and disruptive' thin cap regime

CPA Australia has told the Board of Taxation (BoT) that Australia’s thin capitalism regime, in its current form, deters inbound capital and imposes compliance costs disproportionate to any additional integrity benefits.

In a recent submission to the BoT’s review into Australia’s thin capitalism regime, the accounting body warned that without targeted changes, the regime could become “a permanent drag on Australia’s productive investment and competitiveness“.

The body said that while the regime had succeeded in its principal objective of curbing excessive debt deductions by multinationals, further issues needed to be addressed.

“The regime has succeeded in its principal objective: it has made it significantly harder to use asset inflation or manufactured related-party debt to shift profits out of Australia,“ the submission said.

“However, the practical operation of the new regime has proven materially more complex and disruptive than the policy intent required. Member feedback consistently identifies a fundamental tension: the blunt nature of an earnings-based cap, particularly the 30 per cent fixed ratio test (FRT), is catching genuine, commercially driven financing arrangements alongside the abusive structures it was designed to target.“

This is most acute in capital-intensive sectors such as infrastructure, renewables, property, CPA Australia said, where EBITDA is structurally low or negative during development phases, and in common group treasury arrangements where the third party debt test (TPDT) conditions cannot be met due to standard commercial security and credit support practices.

CPA Australia has recommended that the government implement targeted legislative and administrative refinements to better distinguish integrity risks from genuine commercial activity.

This includes clarifying core definitions and introducing workable de minimis/safe harbours, moving the $2 million threshold to a net concept, and narrowing debt deduction creation rules (DDCR) through purpose-based relief, while preserving the overall integrity objectives of the reforms, the accounting body said.

The submission said that the practical consequences of the new regime are now clearly visible across Australia’s business community.

“In responding to the reforms, taxpayers have been forced to amend financing facilities to satisfy limited-recourse rules, undertake forensic apportionment exercises to align with ATO PCG risk zones, refinance to third-party debt, and maintain detailed Continuity of Ownership Test documentation to preserve carry-forwards,“ it said.

“At the group level, treasury functions have been fundamentally restructured: entities are centralising ’clean’ external borrowing vehicles, embedding purpose-tagging and tracing in treasury systems, formalising TPDT and obligor governance in legal agreements, and shifting to equity-first distributions to avoid DDCR taint.

“These are not the behaviours of entities engaged in profit-shifting – they are the compliance responses of legitimate businesses navigating an overly complex regime.

The accounting body also outlined that the burden had fallen across a wide stakeholder base, from large multinationals and foreign permanent establishments to mid-market groups and their advisers.

“The economic consequences are tangible: members report deleveraging to stay under thresholds, equitisation of related-party debt, increased cost of capital, and delayed or foregone investment in large-scale projects,“ CPA Australia said.

“Australia is losing ground to jurisdictions perceived as more commercially flexible.“