Australia

Details

  • Service: Tax, Dispute Resolution
  • Type: Regulatory update
  • Date: 7/08/2013

Tax Insights

KPMG's analysis of tax issues and developments.

Peter Murray

Peter Murray
Partner, Tax

+61 3 9288 6677

petermurray@kpmg.com.au

Defending your entitlement to future interest deductions 

by Peter Murray, Tax Law Specialist

In the May Budget 2013, the Government announced its intention to crack down on interest deductions claimed by corporates in two key ways: reducing the thin cap limit and denying deductions for interest relating to exempt income (or NANE (Non-Assessable Non-Exempt) as it is known). In relation to the latter, corporates have not needed to perform detailed tracing exercises for more than ten years.

Given the continual pressure on corporates to reduce financing costs, the problem will be ensuring that in adjusting to the new paradigm of interest deductibility, whatever it may be, the steps taken in refinancing debts or altering debt structures do not attract a challenge from the Commissioner under the general deduction provisions or Part IVA.

 

In either case, the defence will lie in the quality of the evidence and not taking short cuts in implementing the changes. Unfortunately, while normal commercial actions are often directed at reducing the recording process and concentrating on the essentials, this often causes problems in tax audits because there is an insufficiency of detail around what was done and why.

 

In what will be a challenge for corporates and the Commissioner, and undoubtedly the focus of compliance activities in the future, it will pay 'dividends' in the long run to make sure this is done properly. A similar situation arose some years ago and the Commissioner successfully applied Part IVA to a taxpayer who was adjusting to a new interest deduction framework: Consolidated Press Holdings and section 79D. The Commissioner may well see the new Part IVA as further strengthening his arm in these encounters.

 

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