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Amendments to the Thin Capitalisation rules – ATO's PAG consultation topics and prioritisation

A summary of PAG topics raised by stakeholders on the new Thin Capitalisation rules and how these will be prioritised.

Published 10 May 2024

Background

On 8 April 2024, the Treasury Laws Amendment (Making Multinationals Pay Their Fair Share-Integrity and Transparency) Act 2024 (amendments to the Thin Capitalisation rules) received Royal Assent.

The ATO’s public consultation on potential public advice and guidance (PAG) topics, prioritisation and form arising from the amendments to the Thin Capitalisation rules was open from January 2024 to 30 April 2024.

In response to the ATO’s request for potential PAG topics, prioritisation and form, we received submissions from a variety of stakeholders including:

  • Taxpayers
  • Members of ATO stewardship groups (Large Business Stewardship Group (LBSG), National Tax Liaison Group (NTLG), Private Groups Stewardship Group (PGSG))
  • Industry groups
  • Tax training associations
  • Tax advisory firms

Now that consultation has closed, feedback provided in submissions has informed what will be the ATO’s PAG priorities.

PAG topics and prioritisation

The following table provides a high level summary of the topics raised by stakeholders in consultation as matters that would, in their view, benefit from PAG.

Informed by stakeholder feedback, the table is presented in two parts.

  • The first part contains the topics which we will resource progressing our views and developing PAG on as a matter of priority. As part of this, we will engage with stakeholders later this month (May 2024). We will also look to share indicative timeframes for key milestones (such as PAG drafting, consultation and completion).
  • The second part contains other topics raised by stakeholders. Subject to identified need and the ATO’s overall PAG priorities, these topics may be considered at a later stage.

The ATO is also committed to updating the thin capitalisation guide on ato.gov.au to address non-interpretative operation of the amendments to the Thin Capitalisation rules. This guidance will be general in nature and we do not anticipate consultation will be undertaken on it prior to publication.

High priority issues – development of relevant PAG will be prioritised as follows

Number

PAG topic

Description

Restructures in response to the new law
  • Compliance guidance on the Commissioner’s application of Part IVA and/or the Debt Deduction Creation Rules (DDCR) specific anti-avoidance provision (820-423D) to certain restructures in response to the new law
  • We will also consider providing compliance guidance on tracing and apportionment issues relating to historical debt arrangements for the purposes of applying the DDCR. The ATO’s commitment to providing guidance on this aspect of this topic will be dependent on stakeholder engagement and submissions

 

Third party debt test (TPDT) – key concepts

Interpretive guidance on key aspects of the third-party debt conditions (for example, ‘minor or insignificant’ in 820-427A(3)(c))

 

Interaction of transfer pricing and the new thin capitalisation rules

Compliance guidance to address concerns in applying existing PAG (e.g. Practical Compliance Guideline PCG 2017/4 ATO compliance approach to taxation issues associated with cross-border related party financing arrangements and related transactions)

 
Other issues raised that may be considered following completion of high priority PAG

Number

PAG topic

Description

TPDT – further key concepts
  • Eligibility for the credit support concession for certain development assets
  • Application of conduit financing conditions, including the restrictions on same terms (for example, ‘passing through’ swaps and bundling of external loans)

 

Interaction of transfer pricing and the new thin capitalisation rules

Ordering of transfer pricing and thin capitalisation provisions (e.g. updates to TR 2014/6)

DDCR – key concepts
  • Interpretation of key concepts in the DDCR, particularly 820-423A(2), (5) and (5A)
  • Interaction of DDCR with other tax provisions, including thin capitalisation and Division 7A

 

'Debt deduction’ definition

Expanded definition of ‘debt deduction’ to include amounts ‘economically equivalent to interest’

 

'Financial entity’ definition

Narrowed definition of ‘financial entity’

Associate entity’ definition

Applying the modified definition of ‘associate entity’ for purposes of the new rules

Gateway issues

Working out whether an entity is a general class investor

Choices

Making or revoking a thin capitalisation test choice

EBITDA
  • Calculating ‘tax EBITDA’ including disregarded amounts
  • Calculating ‘excess tax EBITDA amount’
  • Calculating FRT disallowed amounts (including consolidation and loss utilisation modifications).

 

Group ratio

Calculating the 'group ratio’ including identifying relevant financial statements

 

Other

Documentation and evidentiary requirements

 

QC102067