What is thin capitalisation?
The thin capitalisation provisions limit the debt deductions that certain entities can claim for tax purposes based on the tests set out in Division 820 of the ITAA 1997. These rules ensure that taxpayers fund their Australian operations with an appropriate amount of equity.
What are the debt deduction creation rules?
The debt deduction creation rules disallow debt deductions paid or payable, directly or indirectly, to associate entities and created in connection with certain acquisitions from associates or funding certain payments or distributions to associate entities. These rules don't apply to ADIs or securitisation vehicles, or entities that are exempted from their application under the $2 million dollar threshold exemption or the exemption for certain special purpose entities.
The debt deduction creation rules will apply to all debt deductions for income years starting on or after 1 July 2024.
What if the thin capitalisation rules affect you?
If the thin capitalisation rules affect you, the trust must complete section D of the International dealings schedule 2024, unless the trust was a subsidiary member of a consolidated group or MEC group for the entire income year.
Where the trust is a member of a consolidated group or MEC group for the whole income year and the thin capitalisation apply, the responsibility for preparing the schedule will rest on the head company of the group.
Where a return is required because the trust had a period in the income year when it was not a member of a consolidated group or MEC group (a non-membership period) the trust should complete an International dealings schedule 2024 where the thin capitalisation rules apply to the trust during the non-membership period.
For more information on reporting multiple non-membership periods during the year, see the Consolidation reference manual, sheet C9-5-110.
The International dealings schedule is available through the PLS or complete and lodge the paper schedule.
What happens if the thin capitalisation tests are breached?
If the thin capitalisation tests are breached, some of the trust’s debt deductions may be denied. The amount denied for business income is shown in item 5 – label B Expense reconciliation adjustments. If the trust incurred debt deductions for other types of income (for example, rental income, dividend income or foreign income) the amount of deductions shown at the relevant entries must exclude the debt deductions amount denied.
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