Chapter 1Introduction
Referral of the inquiry
1.1The Treasury Laws Amendment (Making Multinationals Pay Their Fair Share-Integrity and Transparency) Bill 2023 (the bill) was introduced into the House of Representatives and read a first time on 22 June 2023.
1.2On 22 June 2023, the Senate referred the provisions of the bill to the Senate Economics Legislation Committee (the committee) for inquiry and report.
1.3The committee presented its report on 22 September 2023, recommending that the bill be passed subject to technical amendments to Schedule 2 of the bill.
1.4During October 2023, Treasury conducted a public consultation process on the exposure draft government amendments [referred to by the government as ‘parliamentary amendments’ in the Supplementary Explanatory Memorandum (SEM)] and accompanying supplementary explanation material, amending the proposed legislation.
1.5On 5 December 2023, the Senate referred the government amendments to the Treasury Laws Amendment (Making Multinationals Pay Their Fair Share-Integrity and Transparency) Bill 2023 (parliamentary amendments) to the committee for inquiry and report by 5 February 2024.
Purpose of the amendments
1.6The 2022–23 Budget sought to address risks to Australia’s domestic tax base from excessive use of debt deductions.
1.7The bill was introduced in 2023 to strengthen thin capitalisation rules, bringing them in line with OECD best practice by aligning debt deductions with taxable economic activity.
1.8This committee’s report on the provisions of the bill identified that technical amendments were required. Treasury also foreshadowed during that inquiry that it intended to make further technical amendments to address emerging concerns.
1.9The government undertook additional consultation on proposed amendments before circulation to ensure amendments were appropriately targeted. Treasury stated:
The Bill represents a comprehensive policy change to a complex area of tax law. As such, the amendments are the product of ongoing efforts to refine the operation of the draft legislation in response to stakeholder concerns, whilst preserving the integrity intent of the reform.
1.10Treasury advised it has worked extensively with industry stakeholders, and considered new information not previously provided by stakeholders, to ’ensure the thin capitalisation (interest limitation) rules operate as intended’ and to ‘better accommodate the broad range of commercial financing structures and arrangements (including for trusts) and ensure a more targeted scope of application for the debt deduction creation rules’.
Overview of the amendments
Test choice under Subdivision 820-AA
1.11These amendments outline conditions around an entity’s choice of earnings-based test (third party debt test or group ratio test) including conditions for revoking certain choices under Subdivision 820-AA.
Obligor group
1.12Amendments 20 and 21 clarify the number and type of ‘assets of an entity’ a creditor needs recourse to in order be considered an ‘obligor entity’.
Tax EBITDA
1.13A range of amendments are proposed to the treatment of tax Earnings Before Interest, Taxes, Depreciation, and Amortisation (EBITDA) including:
Requirements for entities to add the value of some of their deductions to their tax EBITDA calculation.
Two new deductions are now included: general deductions relating to forestry establishment and preparation costs, and capital costs of acquiring trees.
Clarification on how corporate tax entities calculate their tax EBITDA.
Limiting instances where dividends will be disregarded for tax EBITDA purposes.
Modifications to the calculation of tax EBITDA for Attribution Managed Investment Trusts (AMIT) and members of AMITs.
Requirements for distributions from a trust or AMIT to a beneficiary or member (as the case may be) to be disregarded.
A requirement to subtract notional deductions of research and development (R&D) entities from tax EBITDA.
Changes to tax EBITDA calculations allowing eligible entities to transfer their excess tax EBITDA amounts to other eligible entities. The amendments:
Clarify the kinds of entities the amendments apply to.
Detail conditions that must be satisfied in relation to each eligible entity.
Provide the method for calculating of the controlling entity’s excess tax EBITDA.
Outline treatment of excess amounts transferred to an eligible entity when considering whether that entity has an excess amount itself.
Modifying the meaning of the term ‘Australian entity’ to ensure the term reflects partnerships with a strong connection to Australia and does not allow avoidance behaviour.
The third party debt test
1.14The SEM details proposed amendments to Subdivision 820-EAB (third party debt test) including:
Changes to conduit financing conditions:
Interest rate swap cost conditions.
Terms of ‘relevant debt interest’ and associated ‘ultimate debt interest’.
Modified third party debt conditions for conduit financing.
Enabling the holder of ‘tested debt interest’ to have recourse to additional kinds of assets.
Allowance for recourse to minor and insignificant ineligible assets to be disregarded.
Maintaining the general prohibition on recourse to credit support rights.
Expanding the exemption for certain kinds of credit support under the third party debt conditions.
Clarifying the operation of sections 820-427C and 820-427B including ensuring a reasonable degree of flexibility.
Using the term ‘Australian entity’ (using the modified definition) in subdivision 820-EAA to ensure trusts and partnerships can access the third party debt test.
The debt deduction creation rules
1.15A number of amendments are proposed to debt deduction creation rules including:
Clarifying the ordering between Subdivision 820-EAA (debt deduction creation rules) and all other provisions in Division 820.
Changes to debt deduction creation rule exemptions and exclusions including:
Extending the exemption of certain special purpose entities from the thin capitalisation rules to the debt deduction creation rules.
Excluding Authorised Deposit-taking Institutions (ADIs) and securitisation vehicles from the debt deduction creation rules.
Clarification of debt deduction limitation rules including:
Provisions relating to indirect acquisition of a Capital Gains Tax (CGT) asset through an interposed entity.
A new related party debt deduction condition.
Changes to the application of subsections relating to financial arrangements involving associate pairs and amount of debt deduction disallowed.
Modified meanings of ‘associate pair’ and ‘Australian entity’.
Deferral of start date for debt deduction creation rules to income years commencing on or after 1 July 2024.
Other matters
1.16The proposed changes include minor amendments to the modified definition of ‘associate entity’.
1.17Amendments are also proposed to ensure that fixed ratio test disallowed amounts are appropriately dealt with under the allocable cost amount provisions in Division705.
Commencement
1.18The government amendments will commence at the start of the first quarter following Royal Assent. The amendments apply to income years beginning on or after 1July 2023.
1.19Subdivision 820-EAA (relating to the debt deduction creation rules) now applies in relation to assessments for income years starting on or after 1July 2024.
Financial impact
1.20According to the SEM, the government amendments are estimated to decrease receipts by $20 million over the three years from 2023-24, reflecting an amendment to the tax EBITDA calculation to accommodate the forestry and plantation industry.
Table 1.1Financial impact – government amendments to Schedule 2 ($m)
Source: Supplementary Explanatory Memorandum, p. 5.
Consultation
1.21Following introduction of the bill in 2023, Treasury conducted ongoing consultation on both the bill and proposed amendments. It advised:
Treasury held 17 stakeholder meetings in parallel to the Senate Committee’s initial inquiry. As examples, Treasury met with members and representatives of the Corporate Tax Association, Property Council of Australia, superannuation funds (domestic and foreign), infrastructure groups, and financial service groups. These meetings provided a direct forum for stakeholders to raise issues and provide live examples, and allowed [Treasury] to test whether the issues were systematic or isolated to particular taxpayers.
1.22Treasury’s public consultation on the government amendments and supplementary explanation material, held from 18–30 October 2023, received 38submissions (including seven confidential submissions).
1.23Additionally, Treasury engaged with stakeholder groups throughout and following its October 2023 public consultation, holding 21 stakeholder meetings which included regular meetings with the Corporate Tax Association and its members.
1.24The government intends to consult on other elements of its multinational tax integrity package as separate measures.
Legislative scrutiny
1.25The Senate Standing Committee on the Scrutiny of Bills did not raise any concerns regarding the bill, as noted in its Scrutiny Digest 8 of 2023.
1.26The government amendments have not been subject to additional legislative scrutiny.
Human rights implications
1.27The Statement of Compatibility with Human Rights in the SEM states that the government amendments to Schedule 2 to the bill are compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.
1.28The SEM states that the government amendments do not engage any of the applicable rights or freedoms.
Regulatory impact
1.29No Regulatory Impact Statement was provided specifically for the government amendments.
Conduct of the inquiry
1.30The committee advertised the inquiry on its website and wrote to relevant stakeholders and interested parties inviting written submissions by 5January 2024.
1.31The committee received 28 submissions as well as additional information and answers to questions on notice, which are listed in Appendix 1.
1.32The committee held one public hearing for the inquiry on 31 January 2024. The names of witnesses who appeared at the hearing can be found at Appendix 2.
Acknowledgements
1.33The committee thanks all individuals and organisations who assisted with the inquiry, especially those who made written submissions and appeared before the committee at the public hearing.