Revised interest-limitation rules
Australian taxpayers that form part of multinational groups (inbound or outbound) are denied deductions for interest expenditure where they are considered to have excessive debt funding. The current rules limit debt deductions based on three different thresholds – the safe harbour test (debt to asset ratio); an arm’s length debt test; and a worldwide gearing test (debt to equity ratio). Any interest deductions denied under the current rules are lost.
The Government will replace the existing rules and limit interest deductions to 30% of profits (based on Earnings Before Interest, Taxes, Depreciation, and Amortisation (EBITDA)). Alternatively, debt related deductions can be claimed up to the level of the worldwide group’s net interest expense as a share of earnings. The arm’s length debt test will be retained only in respect of external debt funding.
This measure will allow an entity to carry forward and claim the interest expenses denied to a subsequent income year (up to 15 years).
The measures will take effect from the income years starting on or after 1 July 2023. Financial entities will be subject to the existing thin capitalisation rules.
Increasing public tax transparency
In recent years, Australia has introduced several measures to encourage tax transparency for large multinationals in respect of their reporting to tax authorities on global basis. These existing measures have a limited role in providing tax transparency to the public.
To remedy this the Government will require:
- The public release of country-by-country tax information of large multinationals by the ATO;
- The public disclosure of the number, and country of tax residency of subsidiaries by Australian public companies; and
- Tenderers for Australian Government Contracts worth more than A$200,000 to disclose their country of tax residence.
Denial of payments relating to intangibles
With effect from 1 July 2023, Significant Global Entities (entities within groups with global turnover exceeding A$1bn) will be denied a deduction for payments for intangibles made to related parties, where these intangibles are held in low or no tax jurisdictions. This includes jurisdictions with a tax rate of less than 15%, or with tax preferential patent box regimes, where there is insufficient economic substance.
This measure is estimated to increase budget receipts by $250m over a four-year period from FY22-23.