Given the increasing reliance on the arm’s length debt test, taxpayers need to start examining their debt arrangements now to ensure compliance with thin capitalisation requirements.
I draw the following observations from my involvement in submissions on behalf of the peak bodies Infrastructure Partners Australia and the Property Council of Australia.
It is essential to provide certainty for both taxpayers and the Tax Office by simplifying the method for ascertaining whether the arm’s length test is passed. To this end, the arm’s length test:
- should be satisfied where the lender’s are not associates
- should not be an annual test, but apply only at the time debt is issued or its terms materially change
- could introduce certain ratios or data sets to provide industry specific guidance that this test is satisfied. This may not reduce the overall compliance burden as the appropriate ratios for infrastructure assets vastly differ to those for a distribution business.
Essentially, it must be remembered that the safe harbour test is just that, and that the real test is the arm’s length test. Any move to alter this would undermine the thin capitalisation regime in Australia. Taxpayers need to get involved in the BoT review in order to protect their position.