Chartered Accountants ANZ (CA ANZ) has lodged a submission on the draft Taxation Ruling TR 2024/D3 Income tax: aspects of the third party debt test in Subdivision 820-EAB of the Income Tax Assessment Act 1997 (Draft Ruling) and the update to the draft Practical Compliance Guideline PCG 2024/D3 Restructures and the thin capitalisation and debt deduction creation rules - ATO compliance approach (Draft Update) which introduces Schedules 3 and 4 dealing with the Third Party Debt Test (TPDT) under the new thin capitalisation rules and restructuring.

The Draft Ruling and the Draft Update focus on providing further guidance on certain aspects of the TPDT, particularly the third party debt conditions in subsection 827A(3) of the Income Tax Assessment Act 1997 (ITAA 1997). CA ANZ is concerned that the Australian Taxation Office (ATO) is taking an overly restrictive view of the certain aspects of the third party debt conditions including: 

• What is a ‘minor or insignificant’ asset when disregarding those assets in satisfying the condition that the debtholder only has recourse to Australian assets of the taxpayer – We disagree with the ATO’s view that an asset is ‘minor or insignificant’ when the asset has a minimal or nominal value, without consideration of relative values and terms of the debt.
• What are commercial activities of an entity in determining whether the debt funds an entity’s commercial activities in connection with Australia – We disagree with the ATO’s view that capital management and payment of distributions are not part of an entity’s commercial activities.

We have also provided comments to improve the practical application of the compliance approaches and suggest that the ATO consider a compliance approach to enable a taxpayer to make a choice to apply the TPDT at a later date given the late publication of the draft ATO guidance on the TPDT.