Review of the Debt and Equity Tax Rules (including accelerated and final reports)

Background

On 14 May 2013, the then Deputy Prime Minister and Treasurer and the Assistant Treasurer and Minister Assisting for for Financial Services & Superannuation announced that the Board would undertake a review combining a post-implementation review of the debt and equity rules with a review of whether there can be improved arrangements within the Australian tax system to address any inconsistencies between Australia’s and other jurisdictions’ debt and equity rules that could give rise to tax arbitrage opportunities.

On 4 June 2013, the Assistant Treasurer and Minister Assisting for Deregulation announced the terms of reference with regard to this review. In addressing the terms of reference two reports were prepared by the Board including an accelerated and final report as detailed below.

Terms of reference

The Board of Taxation (the Board) is asked to undertake a post-implementation review of the debt and equity rules in the income tax law (Division 974 of the Income Tax Assessment Act 1997).

The debt and equity rules were introduced to classify certain financing arrangements as debt or equity for specified tax purposes (for example, the thin capitalisation rules and the interest and dividend withholding rules) on the basis of the ‘economic substance’ of the arrangement rather than merely on the basis of the legal form. The rules have now been in operation for over a decade.

The standing terms of reference for a post-implementation review requires the Board to consider whether the legislation:

• gives effect to the Government’s policy intent, with compliance and administration costs commensurate with those foreshadowed in the Regulation Impact Statement for the measure;
• is expressed in a clear, simple, comprehensible and workable manner;
• avoids unintended consequences of a substantive nature;
• takes account of actual taxpayer circumstances and commercial practices;
• is consistent with other tax legislation; and
• provides certainty.

In undertaking the post-implementation review, the Board is also asked to:

• examine whether there are any unintended misalignments between the debt and equity distinction and related concepts in the income tax law which could potentially result in inconsistent policy outcomes; and
• consider whether there can be improved arrangements within the Australian tax system to address any inconsistencies between Australia’s and other jurisdictions’ debt and equity rules that could give rise to tax arbitrage opportunities.

To the extent that there are unintended misalignments between the debt and equity distinction and related concepts in the income tax law, the Board should also examine the potential for broader application of the current debt and equity rules to ensure consistent policy outcomes.

On 14 December 2013, the Assistant Treasurer separately announced in a press release that the Government intended to proceed with amendments to the integrity rule in section 974-80, however, the design of this measure would be considered as part of the Board’s review of the debt and equity tax rules being conducted.

The Board is asked to report to the Assistant Treasurer by March 2015.

Consultation process

In undertaking this review, the Board consulted widely to provide all stakeholders with the opportunity to participate in the review.

The Board appointed a working group of its members comprising Mrs Teresa Dyson (Chair of the Working Group) and Mr John Emerson to oversee the review. In addition, the Board asked Mr Frank O’Loughlin, a member of its Advisory Panel, and Mr John Smith to be members of the Board’s Working Group.

Discussion Paper

On 25 March 2014, the Board released its Discussion Paper on the Review of the Debt and Equity Tax Rules.

The then Chair of the Board, Mrs Teresa Dyson, announced the release of the Discussion Paper [PDF 2.07MB | DOC 1.04KB] via a press release. The Board developed this Discussion Paper to invite submissions and facilitate stakeholder consultation on the issues raised in accordance with the terms of reference given for the review.  The Board requested that submissions to this review be made by Friday, 23 May 2014.

Accelerated report

On 19 December 2014, the Board provided the Assistant Treasurer with an accelerated report on the related schemes provisions in section 974-15 and 974-70 and the equity override integrity provision in section 974-80 of the Income Tax Assessment Act 1997.

Board’s report

The Board has completed its review of the debt and equity tax rules and provided its report to government on 31 March 2015.

Government response

On 2 April 2015 the Government announced that consultation would be conducted on draft legislation to implement the Board of Taxations recommended approach to the rules. The Government confirmed that the new rules will operate with prospective effect, and taxpayers who self-assessed in accordance with the 2011 announcement will be protected.

On 10 October 2016 the Minister for Revenue and Financial Services released Exposure Draft legislation and explanatory material to provide greater certainty in relation to integrity rules regarding the taxation of debt and equity. The draft legislation provides greater certainty in relation to the integrity rules by implementing the Board of Taxation’s recommendations to ensure that multiple schemes are treated as a single scheme only when this accurately reflects the economic and commercial substance of the schemes. 

The Exposure Draft legislation and Explanatory Memorandum are available on the Treasury website. Submissions closed on 21 November 2016.

Further information on this review can be obtained from the Board of Taxation Secretariat at (02) 6263 4366 or at taxboard@treasury.gov.au.

Submissions received