26 October 2022

The Multinational tax integrity and enhanced tax transparency discussion paper, released in August 2022, highlights the current Government’s focus on multinational tax avoidance and raises issues with the current law. Although the budget measures announced are light on detail, they have broadly addressed those issues raised.

Thin capitalisation

Measures will be introduced to protect Australia’s corporate tax base through limiting excessive debt deductions for non-financial entities, applying to income years commencing on or after 1 July 2023.

Existing safe-harbour and worldwide gearing tests will be replaced with earnings-based tests to limit debt deductions based on the entities’ activities.

Broadly, the replacement safe-harbour test will limit an entity’s debt-related deductions to 30% of profits and allow denied deductions to be carried forward and claimed in subsequent income years.

The replacement worldwide gearing test will allow a group entity to claim debt-related deductions up to the level of the worldwide group’s net interest expense as a share of earnings (which may exceed the 30% ratio above).

Finally, the arms’ length debt test will be retained as a substitute test, only applying to an entity’s third-party debt and disallowing deductions for related party debt.

Intangibles

A new anti-avoidance rule will prevent significant global entities (SGEs) from claiming deductions for intangible payments made to related parties in low or no-tax jurisdictions on or after 1 July 2023.

The definition of a low or no-tax jurisdiction is one having either a tax rate of less than 15%, or one with preferential patent box regime without sufficient economic substance.

Tax transparency

Commencing 1 July 2023, new reporting requirements will require SGEs to prepare certain tax information for public release on a country-by-country basis.

Further, Australian public companies (listed and unlisted) will be required to disclose the number of subsidiaries and their respective countries of tax residence, while tenderers for Government contracts over $200,000 will disclose their ultimate head entity’s country of tax residence.

If you’d like to discuss the changes announced in the Federal Budget, please get in touch with our Tax Advisory team.