On 17 July 2014, the Tax and Superannuation Laws Amendment (2014 Measures No. 4) Bill 2014 was introduced to the Federal parliament. If enacted in its current form, this Bill will result in modifications to the thin capitalisation rules for the first financial year of taxpayers commencing on or after 1 July 2014.
Very broadly, the thin capitalisation rules seek to limit the amount of deductible debt that certain taxpayers may have.
The most critical changes that would be made to the thin capitalisation rules by this Bill are as follows:
- the de minimus exception will rise from $250,000 to $2 million;
- the safe harbour debt amount ratio (broadly, the debt-to-asset ratio) will be reduced from 3:1 (75%) to 1.5:1 (60%) for general entities and from 20:1 to 15:1 for non-bank financial entities;
- the worldwide gearing ratio will be reduced from 120% to 100% with an equivalent adjustment to the worldwide capital ratio for banks;
- a worldwide gearing test will now be applicable to inward investing entities; and
- the safe harbour capital limit for banks will be increased from 4 per cent to 6 per cent of their risk weighted Australian assets.
In essence, these changes are aimed at reducing the amount of debt deductions that taxpayers are able to claim.
Taxpayers to whom the thin capitalisation rules apply will need to carefully consider the implications of these measures. For example, if a taxpayer is relying on the safe harbour debt test, the reduction to the safe harbour debt ratio from 75% to 60% may practically require a 20% reduction in gearing to prevent a denial of debt deductions.
Fortunately, there are ways to manage the material financial impacts that might otherwise arise from these changes.
Please contact me if you’re concerned about how these changes may impact you and how you can manage those impacts.