March 17, 2023 Australian Treasury releases Exposure Draft Bills on thin cap changes and tax transparency disclosure of information
Executive summary Following previous announcements and consultation (See EY Global Tax Alert, Australian Treasury releases Discussion Paper on new thin cap rules, royalty deduction rules and public tax disclosure rules, dated 5 August 2022), the Australian Treasury has now released two Exposure Draft Bills and Explanatory Material for consultation, to implement the Government's proposed changes to:
The Government has yet to consult on other elements of its multinational tax integrity package - denying deductions for intangibles, and other aspects of its tax transparency package. Detailed discussion Strengthening Australia's Interest Limitation (Thin Capitalization) Rules The thin capitalization ED Bill (website link here) proposes to replace the current asset-based rules with debt deductions based on "tax EBITDA" for "general class investors" (i.e., not financial entity/authorized deposit-taking institution (ADI)). The ED introduces:
Entities/groups must elect to use the group ratio or external third-party debt test for the financial year in the approved form, however, once the choice is made for an income year it cannot be revoked. The new rules have a revised exemption for outward investing entities in certain circumstances and the AU$2m de-minimis (debt deductions not disallowed if total debt deductions of entity/associate entities are less than $2m) is retained. The ED Bill includes proposed amendments to Sections 25-90 and 230-15 of the Income Tax Assessment Act 1997 (ITAA97) to remove a deduction for interest expenses incurred to derive s768-5 ITAA97 non-assessable, non-exempt (NANE) income (e.g., dividends from foreign subsidiaries). Most commonly, this will be where an Australian company has borrowed funds to invest in, or to acquire, equity interests in a foreign subsidiary. Companies will need to consider the potential impact on merger and acquisition transactions currently in progress, which may require immediate consideration. The proposed rules are complex and detailed, and as such will require careful attention. This measure is proposed to apply to income years commencing on or after 1 July 2023. Treasury is accepting submissions by 13 April 2023. Tax Transparency - Disclosure of Subsidiary Information The multinational tax transparency disclosure of subsidiaries ED Bill (Treasury website link here) proposes to:
This measure is proposed to financial statements prepared by public companies for each financial year commencing on or after 1 July 2023. Treasury is accepting submissions by 13 April 2023. ____________________________ For additional information with respect to this Alert, please contact the following: Thin Capitalization Ernst & Young (Australia), Sydney
Ernst & Young (Australia), Melbourne
Ernst & Young (Australia), Brisbane
Ernst & Young (Australia), Perth
Ernst & Young LLP (United States), Australia Tax Desk, New York
Disclosure of Information Ernst & Young (Australia), Sydney
Ernst & Young LLP (United States), Australia Tax Desk, New York
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