New international tax measures affecting private groups

New thin capitalisation rules

The Amending Australia's interest limitation (thin capitalisation) rules is also known as the 'new thin capitalisation rules.' Changes were made to align with the Organisation for Economic Co-operation and Development's (OECD) Base Erosion Profit Shifting (BEPS) Action 4. The new rules are now law and apply to income years starting on or after 1 July 2023. The debt deduction creation rules start 12 months later.

The amendments apply to most multinational businesses operating in Australia, privately owned Australian entities that are foreign controlled, and to privately owned and wealthy groups with outbound operations. The de minimis threshold where debt deductions don't exceed $2 million continues to apply and includes debt deductions of all associate entities for that year.

Under the new rules, 'general class investors' will be subject to one of 3 new tests.

Fixed ratio test:

• an earnings-based ratio test that will limit an entity’s net debt deductions to 30% of its tax earnings before interest, taxes, depreciation, and amortisation (EBITDA)
  • debt deductions exceeding the 30% EBITDA limit will be denied
  • denied deductions can be carried forward for a maximum of 15 years (subject to the 30% EBITDA limit each year). This method is the default method unless a taxpayer makes a choice to use one of the other 2 methods.

Group ratio test:

• an earnings-based worldwide gearing ratio test that will limit net debt deductions based on a ratio of the worldwide group’s net debt deductions and EBITDA based on the worldwide group's financial statements
  • there is no carry forward of denied deductions under this method.

Third-party debt test:

• an entity’s external (or third party) debt deductions, except for non-qualifying external debt deductions, will be allowed in full
  • debt deductions attributable to related parties are denied under this test
  • there is no carry forward of denied deductions under this method.

The arm's length debt test has been removed for all taxpayers.

Private groups including those with cross-border related party loans should also consider whether the terms and conditions of their arrangements, including interest rate and debt amounts are arm's length under Australia's transfer pricing rules.

General class entities should also consider their approach when determining their remaining debt deductions for applying the fixed ratio test or third-party debt test. This is because the previous transfer pricing limitation in section 815-140 (that an arm's length interest rate was applied to the actual amount of their debt for thin capitalisation purposes) has been removed.

The new thin capitalisation rules are supported by the debt deduction creation rules (DDCR) that deny debt deductions arising from relevant related party loans to fund asset acquisitions, or prescribed payments such as distributions and returns of capital. The DDCR rules reduce the ability for multinational businesses and private groups, with at least $2 million in debt deductions (on an associate inclusive basis), to create debt through internal transactions.

The DDCR apply to income years starting on or after 1 July 2024 and apply to both existing and new domestic and international arrangements.

Complying Division 7A loans are not excluded from the operation of the DDCR.

The old thin capitalisation rules continue to apply to Australian plantation forestry entities.

For more information and other useful resources, see:

• Thin capitalisation for information and guidance about the thin capitalisation rules and who they apply to.
• Debt deduction creation rules and private groups for a summary of DDCR and how they affect private groups.
• Debt deduction creation rules and Division 7A to learn about how DDCR applies and interaction with Division 7A.

Global and domestic minimum tax

On 9 May 2023, as part of the 2023–24 BudgetExternal Link, the government announced it will implement key aspects of Pillar Two of the OECD/G20 Two-Pillar SolutionExternal Link, to address the tax challenges arising from the digitalisation of the economy.

Specifically, the announcement included the intention to implement the Global Anti-Base Erosion Model RulesExternal Link (GloBE Rules). They provide for a coordinated system of taxation intended to ensure in-scope multinational enterprise groups (MNE groups) are subject to a global minimum tax rate of 15% in each of the jurisdictions where they operate.

The legislation includes a:

• 15% global minimum tax for MNE groups with the:
  • Income Inclusion Rule (IIR) applying to fiscal years starting on or after 1 January 2024
  • Undertaxed Profits Rule (UTPR) applying to fiscal years starting on or after 1 January 2025.
• 15% domestic minimum tax for MNE groups applying to fiscal years starting on or after 1 January 2024.

See global and domestic minimum tax for more information on the implementation of Pillar Two of the OECD/G20 Two-Pillar Solution in Australia.

Strengthening the foreign resident capital gains tax regime

As part of the Budget 2024–25External Link, the Australian Government announced it will strengthen the integrity of the foreign resident capital gains tax (CGT) regime to ensure foreign residents pay their fair share of tax in Australia and to provide greater certainty about the operation of the rules.

As such, proposed amendments will be made to non-resident CGT provisions in Division 855 (Div 855) of the Income Tax Assessment Act 1997. The changes will apply to CGT events starting on or after 1 July 2025, and will:

• clarify and broaden the types of assets that foreign residents are subject to CGT on
• amend the point-in-time principal asset test to a 365-day testing period
• require foreign residents disposing of shares and other membership interests exceeding $20 million in value to notify the ATO, prior to the transaction being executed.

This measure will ensure that Australia can tax foreign residents on direct and indirect sales of assets, with a close economic connection to Australian land, more in line with the tax treatment that already applies to Australian residents. The new ATO notification process will improve oversight and compliance with the foreign resident CGT withholding rules, where a vendor self-assesses their sale isn't taxable real property.

These reforms will also improve certainty for foreign investors by aligning Australia’s tax law for foreign resident capital gains more closely with OECD standards and international best practice.

This measure is not yet law.