The Tax Institute welcomes the opportunity to make a submission to the Treasury in relation to the Treasury Laws Amendment (Measures for Future Bills) Bill 2023: Thin capitalisation interest limitation exposure draft legislation (draft Bill) and accompanying draft explanatory memorandum (draft EM).
In the development of this submission, we have closely consulted with our National Large Business and International Technical Committee to prepare a considered response that represents the views of the broader membership of The Tax Institute.
The draft Bill proposes to fundamentally change the thin capitalisation tax regime that has been well understood and applied by taxpayers. It is important to ensure that the changes do not result in unintended or unfair outcomes for taxpayers. We consider that the draft Bill requires clarification and amendments to achieve this balance. Suggested amendments include ensuring that:
- the choices taxpayers are required to make provide sufficient flexibility to account for changes in future economic conditions;
- new concepts are reflective of commercial realties and do not inequitably hinder common business practices;
- new definitions of ‘Tax EBITDA’, ‘associate entity’ and ‘debt deduction’ set appropriate perimeters and are supported by the draft EM with guidance that will assist taxpayers to understand and apply the new concepts;
- sufficient clarification and guidance is provided for new concepts, we suggest this should also be added to the draft EM; and
- the proposed start date gives taxpayers enough time to understand the implications on their existing arrangements.
The Tax Institute also has concerns regarding the proposed amendments to section 25-90 of the Income Tax Assessment Act 1997 (ITAA 1997). The proposed amendment intended to deny a deduction for interest expenses incurred to derive non-assessable non-exempt (NANE). The proposed amendments are also likely to have significant economic impacts, disincentivising Australian businesses seeking to expand offshore, reducing their competitiveness compared to businesses operating in more favourable conditions in overseas markets. Despite the significant impacts, this change was not part of Government’s original consultation in August 2022 concerning ‘Multinational tax integrity and tax transparency’ and was not announced prior to appearing in the draft Bill.
The Tax Institute is of the view that Government should not proceed with the proposed amendments to section 25-90 of the ITAA 1997. The policy rationale for the measure is not supported by the original policy intent of the provisions, and the impacts on taxpayers and the economy are likely to outweigh any perceived benefit. If Government intends to introduce the measure, we consider that a separate consultation period is required to allow taxpayers and tax practitioners sufficient opportunity to notify Government of the practical impacts of this change, and provide views to allow for a better implementation of the measure.