The change applies to existing debt arrangements, effective from 1 July 2014. Accordingly, the new provisions operate retrospectively (retroactively).
Thin cap rules and safe harbour
Australia’s thin capitalisation rules require that the level of debt (both related and third party) is not to exceed an arm’s length amount.
The safe harbour provides greater administrative certainty to corporate groups looking to manage their thin capitalisation position.
The Board of Taxation is also reviewing the arm's length debt test with a reported intention to make it easier to comply with and administer, and to clarify under what circumstances the test is to apply.
With the reduction in the safe harbour thin capitalisation limit to 60%, it may be appropriate for taxpayers to examine their thin capitalisation positions.
For example, corporate groups may evaluate their thin capitalisation positions, including determining the level of debt representing an arm’s length amount—i.e., how much a third-party lender would lend to that group as well as how much the group may reasonably be expected to borrow. This may be especially valid for corporate groups in certain capital intensive industries—e.g., real estate and infrastructure.
In addition, corporate groups with identifiable intangible assets may want to evaluate and consider whether the value of such assets on their balance sheets reflects the current market value of an identifiable intangible asset. If not, consideration could be given as to whether these assets need to be revalued for thin capitalisation purposes.
Read a July 2014 report prepared by the KPMG member firm in Australia: Thin capitalisation changes – time to reassess
Contact a tax professional with KPMG's Global Transfer Pricing Services.