The Government has released for comment draft parliamentary amendments to the thin capitalisation changes and the debt deduction creation rules in Treasury Laws (Making Multinationals Pay Their Fair Share – Integrity and Transparency) Bill 2023 (the Bill).

The exposure draft legislation is seeking to amend very complex provisions in the Income Tax Assessment Acts. CA ANZ is concerned that the eight-working day consultation period is not enough time for stakeholders to be able to digest the proposed amendments and test the draft provisions to see if the stated outcome is achieved by the draft provisions.

During this extremely short consultation period, the following additional issues have been identified in relation to thin capitalisation – such as:

• needing to align the thin capitalisation (TC) direct control interest tests for accessing trust excess tax EBITDA and disregarding trust distributions from Tax EBITDA. At the moment an entity is required to include exclude trust income from a trust that is controls more than 10% of but can only access a portion of a trust’s excess tax EBITDA if it controls more than 50% of the trust. This leaves an entity, which has control of a trust of 10% or more but less than 50%, unable to include its trust distribution in the Tax EBITDA calculation as well as unable to access any trust’s excess tax EBITDA.
• removing the different treatment between trusts and other legal entities when allowing excess tax EBITDA to be shared. At the moment only trusts can share excess tax EBITDA.
• the appropriateness of requiring prior year tax losses to be utilised given that the objective of the new 30% EBITDA fixed ratio test is to reflect that an entity’s interest deductions are directly linked to the taxable income generated by its economic activities in an income year.
• relaxing the prohibition of guarantee, security and other credit under the third party debt test conditions, by focusing on foreign providers, to improve multinational groups access to the third party debt test from a practical perspective.

Regarding the new debt deduction creation rules, CA ANZ expresses great concern about:

• the technical drafting of the provisions
• the retrospectivity of the proposed changes from 1 July 2024
• the transitional period and potential restructuring of existing financial arrangements by multinational groups to comply with the debt deduction creation rules. It appears that any refinanced debt arrangement could fall foul of the section 820-423D anti-avoidance rule as it is a new financial arrangement entered into after 22 June 2023 and section 820-423D captures a scheme where the principal purpose was to avoid the application of the debt deduction creation rules.