Review of the Thin Capitalisation Arm’s Length Debt Test


On 14 May 2013, the then Deputy Prime Minister and Treasurer and the then Assistant Treasurer and Minister Assisting for Deregulation announced that the Board would undertake a review examining the arm’s length debt test as it applies to the thin capitalisation rules to make it easier to comply with and administer, and to clarify in what circumstances the test should apply.

On 4 June 2013, the then Assistant Treasurer and Minister Assisting for Deregulation announced the terms of reference with regard to this review.

Terms of reference

The Board of Taxation (the Board) is asked to undertake a review of the thin capitalisation arm’s length test contained in Division 820 of the Income Tax Assessment Act 1997.

The arm’s length test is intended to provide a carve-out from the thin capitalisation rules for a level of debt which is considered to be ‘commercial or independent’. The arm’s length test focuses on what the businesses acting at arm’s length would borrow and what independent commercial lenders would lend to the business (the policy).

Having regard to that policy, the Board is to consult on ways to make the arm’s length test more effective by reducing compliance costs for business and making it easier for the Australian Taxation Office to administer.

In addition, the Board should consider who should be eligible to access the arm’s length test and in what circumstances.

The Board should consider views put forward and provide its recommendations in a report to the Government by December 2014.

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 Ms Elizabeth Jameson (Chair of the Working Group), Mrs Teresa Dyson and Mr Keith James to oversee the review. In addition, the Board has asked Mr Mark Goldsmith, a member of its Advisory Panel, to be a member of the Board’s Working Group.

Discussion paper

On 16 December 2013 the Board released its Discussion Paper on the Review of the Thin Capitalisation Arm’s Length Debt Test.

The Chair of the Board, Mrs Teresa Dyson, announced the release of the Discussion Paper via a press release. The Board developed this Discussion Paper to invite submissions and facilitate stakeholder consultation on the issues raised. The Board requested that submissions to this review be made by 14 March 2014.

Board’s report

The Board completed its review of the thin capitalisation arm’s length debt test and provided its report to the Government on 19 December 2014. No formal response was received from the Government.

On 4 June 2015, the Government announced the release of the Board’s report on its review of the thin capitalisation arm’s length debt test.

Further information on this review can be obtained from the Board of Tax Secretariat on (02) 6263 4366 or at

Submissions received

Submitter Download
Australian Bankers Association 254KB
Australian Private Equity and Venture Capital Association Limited 205KB
CPA Australia 257KB
Deloitte 1MB
Ernst & Young 186KB
Institute of Chartered Accountants Australia 405KB
Pitcher Partners 3MB
Property Council of Australia 515KB
PwC 264KB
The Tax Institute 220KB