On 30 January 2024, the Australian Taxation Office (ATO) announced that it is seeking public input and feedback on guidance and advice related to the amendments to the interest deduction limitation rules, also known as thin capitalization rules. These amendments are part of the Treasury Laws Amendment (Making Multinationals Pay Their Fair Share—Integrity and Transparency) Bill 2023, which is still pending approval from Parliament.
Schedule 2 of the Bill establishes new earnings-based assessments for ‘general class investors’. The assessments replace the existing safe harbor test with a fixed ratio test. Similarly, the existing worldwide gearing test is substituted with a group ratio test.
Schedule 2 of the Bill also introduces a third-party debt test for general class investors and non-authorized deposit-taking institutions (ADIs) in the financial sector. Under these new rules, entire or partial debt deductions incurred by general class investors may be disallowed in a given income year.
Schedule 2 also proposes a new Subdivision 820-EAA, which outlines the rules for debt deduction creation to limit the extent debt deductions can be claimed in relation to debt creation schemes.
On 28 November 2023, the Australian government released the amendments and a supplementary explanatory memorandum to the interest limitation rules within the Treasury Laws Amendment (Making Multinationals Pay Their Fair Share—Integrity and Transparency) Bill 2023.
