Recently the Australian Treasury has proposed to introduce a number of changes that are applicable from 1 July 2023. The proposals are part of the Australian Government’s measures to improve tax integrity and tax transparency and other public reporting.
This article seeks to provide an overview of the proposed measures.
Changes to the thin capitalization regime
Fixed Ratio Test (FRT)
Group Ratio Test (GRT)
External Third- Party Debt Test (ETPDT)
The proposed law also makes consequential changes to the transfer pricing regulations. Taxpayers are now required to support the arm’s length nature of the interest rate of a related party loan as well as the debt amount. As such, if the debt amount or the interest rate is not arm’s length in nature, then the reconstruction provisions will trigger, resulting in the application of the thin capitalization tests to the “arm’s length” interest expense.
Denial of intangible asset payments
The Australian Treasury issued an exposure draft on denying deductions of payments made for the use of intangible assets to associated entities located in low tax jurisdictions. The object of this proposed legislation is to deter Significant Global Entities (SGE) from avoiding tax by structuring their arrangements relating to the use of intangible assets.
Public disclosure of tax-related information
Under the proposed law, large global groups that operate in Australia, would be required to make public tax-related disclosures for every jurisdiction in which the group operates. These requirements are in addition to the Country-by-Country Reporting (CbCR) requirements that are required to be lodged with the relevant tax authorities.
The proposed regulation applies if an entity meets all the below conditions:
Details to be provided
Impact of non- compliance
The above measures are pursuant to the Australian 2022-23 Federal Budget and consultation on multinational tax integrity and tax transparency. Whilst the proposals are currently in draft and invite comments from the public, the start date for the proposed changes is not far off. It is important that large companies are prepared and proactively manage their tax reporting and compliance obligations.