We have seen that modelling the denial under the lower ratios not only gives an indication about the quantum of the potential denial, it also focuses attention on the question of whether there are any ways to minimise the impact of the proposed changes. Potential ideas could include using alternative methods of financing investments, performing more sophisticated thin capitalisation calculations and making better use of the choices available under the rules.
It will also be necessary to monitor developments in relation to the proposed changes to Section 25-90 of the Income Tax Assessment Act 1997 in the context of denying interest expense associated with deriving Section 23AJ (Income Tax Assessment Act 1936) dividends from offshore entities, such as methods of tracing debt in these circumstances (and the interaction with the thin capitalisation regime). Businesses should also continue to monitor the Board of Taxation’s report into the arm’s length test and also the implementation date.
Given that any thin capitalisation denial will be a permanent difference and adversely impact the effective tax rate, boards and senior management should be interested in the proposed changes and the potential impact on their business. As such, it is an important issue to consider in advance of the changes so any action can be taken before July 2014 and management can be properly advised.