The Senate Economics Committee (Committee) has released its report (Report) outlining its recommendations in relation to the proposed reforms to the thin capitalisation regime, the new debt deduction creation rules and new tax transparency rules contained in the Treasury Laws Amendment (Making Multinationals Pay Their Fair Share – Integrity and Transparency) Bill 2023 (Bill).
KWM made a number of submissions in respect of the Bill and appeared in front of the Committee to give evidence. While the Report was supported by the majority of the Committee, the minority has issued a dissenting report (Dissenting Report) which recommends key changes including deferral of start date and further consultation on the debt deduction creation rules.
The Committee’s recommendation and proposed amendments
The Committee’s key recommendation is that the proposed thin capitalisation reforms be passed subject to certain technical amendments foreshadowed by Treasury.
While it is welcome to see that the Committee has acknowledged that some amendments are appropriate, it is unclear whether these will address many of the significant issues raised in the submissions (including by KWM). Based on the Report and Treasury submissions, we expect the following outcomes are likely:
- Limitations to the scope of the debt deduction creation rules. Treasury is proposing to limit the scope of the provisions, including introducing specific exclusions similar to those found in the former Division 16G. Treasury has however flagged that there should be no grandfathering of existing arrangements.
- Amendment to fixed ratio test to address non-consolidated structures such as trust groups. While the exact nature of the “technical” amendments to the fixed ratio test is currently unclear, hopefully these will include changes to address issues with non-consolidated structures (such as trust groups) and the inadvertent exclusion of Attribution Managed Investment Trusts.
- Amendments to third party debt test. Treasury is currently considering a number of minor technical amendments, such as clarifying the Australian residence requirement to resolve the inadvertent exclusion of trusts.
- Starting date unchanged. The Committee did not recommend any change to the commencement date (currently 1 July 2023), despite the new rules applying retrospectively and the fact that the details of the amendments are still being confirmed over 3 months since their proposed application.
Continuing uncertainty and challenges for taxpayers
The recommendations of the Committee do not address a number of the issues raised in submissions. Key areas of uncertainty and challenges for taxpayers include:
- The precise scope of the “technical amendments” proposed by Treasury and how these will address the concerns raised in submissions.
- The unchanged commencement date (1 July 2023) means entities still lack clarity as to how the amendments could affect existing and proposed arrangements.
- The fact that there will be no grandfathering for existing arrangements (contrary to the views of the dissenting Coalition Senators).
A number of significant issues raised in submissions were not addressed in the main Report, but instead picked up in the Dissenting Report by the Coalition Senators. There are reports that the Coalition intends to suggest comprehensive amendments to the Bill, which we expect to be in line with the recommendations set out in the Dissenting Report.
What happens now?
Treasury appears to be continuing its efforts to consult with taxpayers to ensure the proposed rules operate appropriately, including with representatives of the property sector. It remains to be seen what amendments will be made in response to that consultation, or when they will be made public.
If you would like to discuss the proposed reforms and how the new rules may impact your business, please contact one of the authors or your KWM contact.
