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Trans-tasman thin capitalisation rules and treaties: implications for New Zealand and Australia on tighter thin capitalisation ratios


This article begins by examining the relationship between thin capitalisation rules and double tax treaties. After examining the potential for a fundamental conflict in this area it looks at the OECD’s attempts to resolve the problem (in section 2). In sections 3 and 4, the article examines the key questions relating to the New Zealand thin capitalisation rules and whether the non-discrimination provisions of Article 24 (5) should apply to fixed ratio safe harbour thresholds. Section 5 applies the conclusions to New Zealand’s tax treaty network suggesting that the thin capitalisation regime may be ineffective in certain circumstances with three major trading partners. The specific versus general anti-avoidance rules are considered in section 6.

The implications of the New Zealand analysis are considered in the context of the Business Tax Working Group’s recommendations for potential reform to the Australian thin capitalisation rules (section 7). In the 2013 Commonwealth Budget it was announced that the thin capitalisation “safe harbour” debt limit has been reduced to 60 per cent of adjusted Australian assets for income years continuing on or after 1 July 2014. The Australian threshold now aligns with the changes New Zealand made to the thin capitalisation rules for the 2011/2012 income tax years. The conclusion reached in this article is that the design of thin capitalisation rules necessarily requires consideration of treaty obligations and that both countries should watch carefully developments in this area.

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Craig is Professor of Taxation Law and Policy, University of Auckland Business School.
Current at 1 September 2013
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