Changes to Thin Capitalisation Rules
With the recent reduction in the safe harbour thin capitalisation limit from 75 percent to 60 percent Groups need to consider the potential action required to manage their thin capitalisation position. These changes apply to existing debt arrangements from 1 July and so may be considered to operate retrospectively.
Australia’s thin capitalisation rules require that the level of debt (both related and third party) not exceed an arm’s length amount. However, the safe harbour limit provides greater administrative certainty to Groups looking to manage their thin capitalisation position. The Board of Taxation is also reviewing the arm’s length debt test so as to make it easier to comply with and administer, and to clarify in what circumstances the test should apply.
Groups should be considering how to manage their thin capitalisation position. This may include considering the level of debt representing an arm’s length amount. This requires considering how much a third party lender would lend to that Group as well as how much the Group may reasonably be expected to borrow. This is something that Groups in capital intensive industries, such as real estate and infrastructure, may wish to consider. It would be welcome if the current Board of Tax review assisted in making it easier for Groups to document and comply with the arm’s length debt test.
In addition, those Groups with identifiable intangible assets should consider whether the value of these assets on their balance sheet reflects the current market value of the identifiable intangible. If not, consideration could be given to whether to revalue these identifiable intangibles for thin capitalisation purposes.
With the reduction in the safe harbour thin capitalisation limit to 60 percent, it is worthwhile ensuring that the thin capitalisation position is being actively managed.
Issued: November 2014