The Government has asked the Board of Taxation to independently review the recent changes to Australia’s thin capitalisation rules. These changes were introduced in Schedule 2 of the Treasury Laws Amendment (Making Multinationals Pay Their Fair Share—Integrity and Transparency) Act 2024.
Background
Section 4 of the Act requires this review. The Board will assess whether the changes are operating as intended.
Terms of Reference
In conducting the review, the Board will assess whether the amendments are operating in a manner consistent with the policy intent, which was to strengthen Australia’s thin capitalisation regime to address risks arising from the use of excessive debt deductions, informed by the OECD’s best practice guidance. In considering the operation of the amendments, the Board is requested to consider:
- The overall performance of the amendments in strengthening Australia’s thin capitalisation regime to address risks arising from the use of excessive debt deductions.
- Any minor and technical drafting changes which are necessary for the practical administration of the laws, with a particular focus on the third-party debt test provisions and related undefined legislative terms.
- If 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 in the income year and across multiple income years, as intended.
- The practical impact on the cost of complying with the debt deduction creation rules after restructures, including whether the rules have effectively discouraged debt creation schemes.
The Board will explain why any recommendation made is important and how it will keep the practical effect of the 2024 amendments. It will also consider the balance between complexity and tax integrity.
Consultation
The Board will run a public consultation process to inform their final report. It will also work closely with Treasury and the Australian Taxation Office.
Timing
The review will commence on 1 February 2026. The Board will provide its final written report to the Government within 12 months of the review starting.
Further information on the review will be published soon.