Fortunately the arm’s length test has been retained for now, but all indications are that it will be curtailed following a period of consultation.
The unexpected and worrying announcement was the abolition of Section 25-90, representing a fundamental policy shift in Australia’s treatment of debt funding. This provision was introduced as part of the modernisation and extension of thin capitalisation in 2001, and was based on the philosophy that the thin capitalisation regime was the appropriate policy response to curtail excessive debt. This recognised that an additional tracing test, was unnecessary, and would require an artificial and complex tracing of funds to specific uses (contrary to the reality of how capital is allocated in modern organisations).
If abolished with effect from 1 July 2014, multinational organisations will have to perform an on-going tracing exercise of debt and equity funding to particular uses, not only in relation to new debt, but also in relation to pre-existing debt. It is hoped that, following consultation, the Government realises that the abolition is unnecessary and that an appropriate transition process can be devised and implemented to ensure that companies which raised funds in a “non-tracing” environment and within prevailing rules are not unfairly disadvantaged.
Ultimately it is critical that the Australian outbound multinationals are not disadvantaged in competing on the world stage, and Australia remains attractive as a base for regional headquarters.