ATO Draft Guidance Shapes Australia’s New Thin Capitalisation Landscape – Money Advice Experts in Services

Australia’s new thin capitalisation regime has been a topic of discussion following the Australian Taxation Office’s (ATO) release of draft guidance on the third party debt test and restructures. The ATO’s guidance is crucial for taxpayers navigating the new rules and considering restructures in response to the changes.

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The third party debt test (TPDT) allows entities to deduct debt interest under certain conditions, replacing the previous arm’s length debt test. The ATO’s draft guidance delves into the specifics of each condition of the TPDT, offering insights and examples to clarify its position. It emphasizes the need for compliance and careful consideration of asset recourse and the use of debt proceeds to fund commercial activities in Australia.

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Debt deductions related to hedging have also been addressed in the ATO’s guidance, particularly in scenarios involving back-to-back swaps. The ATO’s compliance approach in Schedule 3 of the draft Practical Compliance Guideline (PCG) provides specific criteria for restructuring arrangements to align with the TPDT conditions, offering clarity and direction for taxpayers.

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Furthermore, the ATO’s proposed compliance approach in Schedule 4 of the PCG focuses on restructures in response to the thin capitalisation changes more broadly. It outlines examples of low and high-risk restructures, shedding light on the potential application of anti-avoidance provisions in certain scenarios.

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Stakeholders have until 7 February 2025 to provide feedback on the draft guidance, allowing for industry input and refinement of the rules. Taxpayers are advised to carefully review the ATO’s guidance and consider necessary restructures to ensure compliance with the new thin capitalisation regime.

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The evolving landscape of thin capitalisation rules underscores the importance of staying informed and proactive in adapting financing structures to align with regulatory requirements. The ATO’s draft guidance serves as a roadmap for taxpayers navigating these changes and underscores the need for strategic financial planning and compliance in the current regulatory environment.