Chapter 2Views on the Bill
Introduction
2.1This chapter examines stakeholder views on the provisions of the Treasury Laws Amendment (Making Multinationals Pay Their Fair Share—Integrity and Transparency) Bill 2023 (the bill). It is informed by the bill’s explanatory materials, submissions received by this inquiry, evidence provided at a public hearing on Tuesday, 15 August 2023, and additional material submitted to the committee.
2.2The chapter provides an indicative account of the key issues relating to the bill and concludes with the committee’s views and recommendations. The discussion is separated into the high-level reforms in relation to the two schedules contained within the bill.
Schedule 1: Multinational tax transparency—disclosure of subsidiaries
2.3As outlined in Chapter 1, Schedule 1 of the bill seeks to make amendments to the Corporations Act 2001 (Corporations Act) to introduce new rules to require that Australian public companies disclose information about their subsidiaries in their annual reports. The amendments would ensure all public companies have equal requirements for reporting basic information on their corporate structures. If implemented, the amendments within the schedule would apply to annual financial reports prepared for financial years commencing on or after 1 July 2023.
Support for the measure
2.4Submissions to the inquiry expressed support for Schedule 1 of the bill and its objective. Submitters noted the importance of the government’s election commitment to ensure that companies provide greater transparency in relation to the disclosure of corporate structures, which will in turn minimise tax avoidance activities and ensure that large multinational companies are not avoiding their obligation to contribute to the funding of public services.
2.5For example, the Centre for Corporate Tax Accountability and Research (CICTAR) and the Tax Justice Network (TJN), among other submitters, welcomed the proposed legislation and were of the strong belief that the disclosure of subsidiaries for Australian public companies is an important step forward in terms of increasing transparency. CICTAR and TJN importantly noted that:
increased corporate transparency is integral to restoring and maintain broader community trust in the tax system;
this approach is consistent with other jurisdictions such as the United Kingdom; and,
Australia should take the lead on setting a new global standard.
2.6Publish What You Pay welcomed the requirement for disaggregated reporting requirements, advocating that all subsidiaries should be disclosed (not just in low or no tax jurisdictions), and that the public should have access to information about a company’s financial records for visibility over taxes, royalties and other payments.
2.7Dr Roman Lanis expressed positive views on the impact that this long overdue measure would have, recommending that the bill be implemented in full:
Research into tax avoidance over the last 10 years has clearly shown that incentives for corporate tax avoidance are impacted (and reduced) by improved public transparency of corporate tax behaviour by way of additional public disclosure. That is, increased public transparency of tax information, which in turn increases public scrutiny, changes the cost benefit function of corporate tax avoidance. It does so by increasing the reputation costs associated with tax avoidance and therefore reduces corporate incentives for tax aggressive behaviour.
2.8This view was also shared by the Australian Council of Trade Unions (ACTU) who stated that the amendments, such as the introduction of the ‘consolidated entity disclosure statement’, are small but important steps to increase corporate transparency and reduce tax avoidance. The ACTU submitted:
Enhanced transparency of how multinational corporations structure their affairs is an important step in minimising tax avoidance… The disclosure statements will make clear whether companies are structuring with deliberately opaque or atypical tax arrangements aimed at minimising taxable income in Australia. In this way, multinational corporations will be made more accountable to the community and their tax structures made more transparent so as to better serve the public interest.
2.9Highlighting the magnitude of the problem that the measure seeks to address, Public Services International stated that:
…globally, government revenue is reduced by US$450 billion per year due to international tax dodging and abuse by multinational corporations and wealthy individuals. As the Bill recognises, corporate tax minimisation undermines the ability of government to fund…vital public services necessary to enable prosperity, reduce inequalities and to keep the economy running.
2.10The Community and Public Sector Union (CPSU) submitted that stronger laws and more transparency on multinational enterprises (MNEs) are required ‘in order to raise the additional revenue needed for public investments that will create a better society and stronger economic future’.
2.11Outlining the rationale for their strong support for what they described as ‘landmark legislation’, both the United Workers Union (UWU) and Financial Accountability and Corporate Transparency Coalition, in separate submissions, recommended that the measure should be passed without delay. Both organisations argued that no further changes should be made so as to ensure that multinational companies cannot avoid ‘the obligation to fund public services, in Australia and globally’.
Specific matters raised by stakeholders
Country-by-country reporting requirements
2.12In addition to a more general discussion on the new disclosure requirements for MNEs contained within Schedule 1, stakeholders made comments on the government’s election commitment to implement a public country-by-country reporting (CBCR) regime. While the proposed CBCR regime is not contained within the bill (as the application date of this provision has been deferred by 12months until 1 July 2024), various stakeholders raised broader concerns on the measure for future consideration by government.In its evidence to the committee, Treasury confirmed that broad consultation on CBCR would commence ‘in the near future’.
2.13The proposed CBCR regime would require the public release of high-level data on the amounts of tax large MNEs pay in the jurisdictions in which they operate, as well as on the number of employees in these jurisdictions. The policy objective of CBCR is to improve community awareness around the arrangements of large MNEs operating within Australia by highlighting the amount of tax these entities pay. The enhanced scrutiny of tax information is said to create a level playing field which can assist in better informing public debate on MNE tax compliance.
2.14Some stakeholders welcomed the government’s decision to delay implementation of CBCR until 1 July 2024 to allow for further deliberation and consultation with industry. For example, the Australian Chamber of Commerce and Industry (ACCI) submitted:
Further consultation is essential to ensure the CBCR requirements are workable, better align with the requirements in other jurisdictions, and do not impose a large administrative and compliance burden on MNEs operating in Australia.
2.15Other stakeholders, such as CICTAR, TJN, UWU, Public Services International, and the Financial Accountability and Corporate Transparency Coalition, were of the view that implementation of the CBCR regime should not be delayed and would complement existing disclosure requirements by providing a holistic view of a company’s global operations.
2.16Representatives from CICTAR, Oxfam, ACTU, and Public Services International provided examples that illustrate that compliance costs for companies would be very marginal and would have the benefit of a substantial increase in transparency. The ACTU submitted:
A public country-by-country reporting standard would enhance transparency consistent with the goals of the Government's legislation. Adoption of the GRI standards would remove one of the most important barriers to tackling corporate tax avoidance in Australia and globally. The ACTU urges the Government to adopt the standards in the interest of tax transparency and maintaining the integrity of the Australian and international tax system.
2.17Concerns of competitive disadvantages and negative impacts on companies from the introduction of CBCR were raised by various stakeholders, including the National Foreign Trade Council, the Tax Executives Institute, AIA Australia and SIFMA Asset Management Group. However, Oxfam International pointed to the experience in the European Union where it argued that the implementation of CBCR, in fact, had the opposite effect:
The experience has really disproved this. There has not been a negative competitive impact from this kind of transparency…many, many institutional investors, with billions and even trillions under management of assets…have come out in support of country-by-country reporting, saying that they view this information as quite vital in their screening of investments and that this is needed for them to make investments…we are also seeing an increasing interest in the impact investment, where investors are willing to also invest in companies that are more transparent and demonstrate a greater degree of responsible tax practices.
2.18Dr Roman Lanis drew the committee’s attention to the overarching policy intent of corporate compliance and increased tax transparency for MNEs, strongly stating that the public interest of the proposed CBCR regime far outweighs issues such as compliance costs raised by stakeholders. Dr Lanis stated that:
...with respect to increased company compliance costs and the proprietary nature of the info with respect to CbCR data. These are common arguments provided by companies against mandatory accounting and tax disclosure proposals. Although those arguments are correct they must always be weighed against the public interest of any disclosures. In the case of additional disclosures such as CbCR (in full) it is my view that the public benefit far outweighs an increase in compliance costs and other costs associated with the proprietary nature of the information.
2.19Recommending that the government proceed with CBCR and adopt the Global Reporting Initiative (GRI), the CPSU were of the strong view that a public CBCR standard would enhance transparency consistent with the goals of the government’s legislation. The CPSU argued that the adoption of the GRI standards ‘would remove one of the most important barriers to tackling corporate tax avoidance in Australia and globally’.
2.20Following much discussion on the proposed CBCR requirements, Treasury provided the committee with an update on the framework, confirming that commencement has been delayed until 1 July 2024 (as outlined above) for consistency with the timing of the European Union’s CBCR framework implementation.
Consultation on the proposed amendments
2.21As outlined in Chapter 1, Treasury undertook consultation processes in relation to the exposure draft legislation and accompanying explanatory material for Schedule 1 of the bill. Some stakeholders, including Chartered Accountants Australia and New Zealand (CA ANZ), King and Wood Mallesons, The Tax Institute, the International Chamber of Commerce, SIFMA Asset Management and the National Foreign Trade Council, suggested that further consultation is required. On this point, King and Wood Mallesons submitted:
Schedule 1 of the Bill would benefit from further consultation and a deferred application date for consideration of how the additional reporting requirements might be streamlined to reduce what will otherwise be significantly increased ongoing compliance costs for affected entities.
2.22By contrast, other stakeholders, including ACCI, AIA Australia, CICTAR and TJN, acknowledged that the government had listened to and implemented stakeholder feedback during the consultation process.
2.23Expressing its appreciation and satisfaction for the stakeholder engagement process, CICTAR and TJN argued that no further changes to the schedule are required (including to the CBCR reporting requirements) after ‘already significant amendments have been made to the draft bill’. Both organisations were optimistic that the government will fulfill a commitment to introducing a robust reporting regime that serves the community.
Schedule 2: Thin capitalisation
2.24As outlined in Chapter 1, Schedule 2 of the bill seeks to amend Australia’s thin capitalisation rules within Division 820 of the Income Tax Assessment Act 1997 (ITAA 1997) to limit the amount of debt that entities can deduct for tax purposes. The amendments would, among other things:
introduce earnings-based interest limitation rules for general class investors to replace the existing asset-based rules; and
introduce a new Subdivision 820-EAA to disallow debt deductions to the extent that they are incurred in relation to debt deduction schemes.
Support for the measure
2.25Submitters expressed broad support for Schedule 2 of the bill and its intent. While there was some discussion from stakeholders regarding the proposed implementation timeframe for the measure, as well as other suggested amendments, stakeholder feedback highlighted the benefits of introducing legislation to resolve a loophole in the existing law and address risks to the domestic tax base arising from the excessive use of debt deductions which amount to profit shifting arrangements.
2.26Expressing its support for the intent of the schedule and the proposed amendments, the Business Council of Australia (BCA) submitted:
All companies must meet their tax obligations and where arrangements do not keep pace with community norms, they should be reviewed. Robust tax integrity and transparency measures are an integral complement to more competitive business tax arrangements.
2.27CICTAR and TJN expressed strong support for Schedule 2 arguing that thin capitalisation has been one of the easiest systems for abuse of profit shifting and tax avoidance and that strong measures are needed to combat this behaviour. Dr Mark Zirnsak from CITAR stated:
…this is a piece of unfinished business to close another loophole…to make it harder and harder and limit the number of opportunities people have to…avoid their responsibility to contribute to the community, because at the end of the day tax is about giving government revenue that it can use for the benefit of the whole community. Businesses are benefiting from many of the measures government puts in place to allow them to operate in markets, so they should be paying a share towards that general good for themselves and the whole community.
2.28A number of stakeholders argued that the amendments are required from a social protection perspective as they will contribute to reducing inequality and the impact that tax avoidance has on Australia’s revenue base. Strongly advocating for multinational tax transparency as a means of reducing tax avoidance, Oxfam highlighted the magnitude of the problem stating:
…experts estimate that close to 40 per cent of multinational profits—close to US$1 trillion in 2019—are shifted to tax havens each year. This shifting reduces corporate tax revenue by more than US$200 billion… In Australia we lost an estimated 14 per cent of corporate income tax to multinational corporations' use of tax havens in 2019, representing a loss of US$9 billion. Rather than feeding the already significant profits of these companies, these funds are desperately needed to restore and grow the aid budget, raise income support rates above the poverty line in Australia and meet the challenges of the cost-of-living crisis.
2.29Also speaking about the vital need for a strong tax basis to fund essential public services, the CPSU stated:
Tax revenue is the primary funding basis of public sector employment for the delivery of public services and the development of public infrastructure. It pays for our criminal, corporate and civil justice systems, as well as our emergency responses, environmental management and services that protect the vulnerable. Without broadening the tax base, Australian governments are forced to reduce public services by laying off staff, deferring necessary infrastructure and suppressing wage growth… Increased corporate tax transparency is integral to restoring and maintaining broader community trust in the tax system. It is deeply unfair when essential workers pay a higher rate of tax on their personal income than some of the world's largest and most profitable multinational corporations. The proposed bill aims to close those loopholes.
2.30Noting that the approach taken in the schedule is consistent with the Organisation for Economic Cooperation and Development’s (OECD) best practice framework rules on base erosion and profit shifting (BEPS), the ACTU expressed its strong support for the proposed amendments to address risks to the domestic tax base. The ACTU argued that the amendments would help contribute to the integrity of the Australian tax system and are ‘an important step in rebuilding confidence in the fairness and integrity of Australia’s corporate tax regime’.
2.31Further, Mr Joseph Mitchell from the ACTU stated:
Taxation makes a positive contribution to society by ensuring funding for our public services, ensuring a strong government support system, and redistributing income and wealth to build a fairer and more equal society. Taxes ensure that Australia has the right infrastructure and legal services to facilitate growth and prosperity… A strong revenue base also means that government's fiscal position is on a sound footing to allow for discretionary spending to support households facing difficult economic circumstances. The current cost-of-living crisis affecting workers highlights the need for a robust fiscal position with adequate buffers that can provide targeted and meaningful support to those feeling the pressure most acutely. Multinational tax avoidance undermines the ability of government to use these important fiscal levers.
Views on the proposed amendments
2.32Noting the general support for the policy intent of the measures, inquiry participants presented mixed views in relation to the proposed reforms to Australia’s thin capitalisation rules. While several submissions recommended that elements of the policy should be rejected outright, options were proposed by participants to modify the measure to address concerns raised as outlined in more detail below.
Economic impacts and unintended consequences
2.33Submitters raised broad concerns that some of the potential unintended consequences of the proposed legislation could far outweigh the anticipated economic, civil and transparency benefits.
2.34King and Wood Mallesons considered that the introduction of the new thin capitalisation measures would create a disincentive for global companies in Australia. They argued there would be number of negative impacts on non-bank lenders which will put them at a competitive disadvantage, prevent Australian companies that need to rely on guarantees and other credit support to raise funds from doing so in an economical way, and have a damaging and inequitable effect on entities. King and Wood Mallesons therefore suggested that the thin capitalisation rules should be amended in a number of ways to reduce the costs and complexity of conducting business in Australia, and balance the protection of the Australian tax base with the broader economic implications of the new rules.
2.35The National Foreign Trade Council contended that there are existing rules in place in Australia designed to ensure that MNEs do not artificially load their debt into their Australian subsidiaries. Further, the council argued that the proposed thin capitalisation measures would put overseas based MNEs at a competitive disadvantage to Australian parent MNEs and lead to less net investment in Australia:
While there may be incrementally more tax collected as a result of these new rules, the net investment in the country will decrease as MNC’s factor in an increased cost of using debt to their investment cost.
2.36Similarly, Deloitte were concerned about potential economic impacts:
Whilst not quantifiable, we submit that some specific features of the measures as currently drafted will be detrimental to future investment in Australia, and in respect of existing investments, will create increased tax costs and / or increased management effort and financing costs to restructure financing arrangements in a policy compliant manner.
2.37As well as raising broader economic concerns, submitters were also concerned about possible unintended consequences on the property sector and Australian forestry industry.
2.38The Property Council of Australia argued that the measure would have a disproportionate impact on the property sector and, without amendments, will result in Australia having one of the most restrictive interest limitation regimes in the world for investments in real estate. In summary, it felt that the schedule goes beyond the stated objective of the changes, and that the bill would negate the benefits of the government’s recent announcement to reduce the withholding tax on buy-to-rent projects and impact housing affordability and supply.
2.39While agreeing with the policy intent of the measure and the government’s commitment to ensure that multinationals should pay their fair share of tax, the Australian Forest Products Association (AFPA) raised a particularly niche concern with the proposed thin capitalisation measure. AFPA stated that the way that the bill is currently drafted has inadvertently captured and will disadvantage the plantation forestry sector, and contended that this has been an oversight in drafting. AFPA submitted that if the bill passes unamended:
…many companies that Australia relies on to invest in plantation forestry to meet Australia's timber needs will be significantly impacted. Currently these companies can claim up to 60% of their debt costs as a tax deduction. Under the bill, many will not be able to claim any of their forestry plantation debt costs as a tax deduction… this...will reduce Australia’s ability to provide the timber products we need to build houses, replace plastics and high emissions materials to help meet Australia’s emissions targets. Accordingly, AFPA recommended that amendments to Schedule 2 be made to enable the plantation forestry industry to continue utilising current thin capitalisation models for determining the quantum of debt deductibility.
2.40Addressing the concerns raised above, Treasury advised the committee that the measure is intended to have the opposite impact on the economy. The bill, Treasury argued, is intended to to strengthen the integrity of the tax system and Australia’s tax base and limit an entity’s use of artificial debt to increase debt levels beyond ordinary commercial levels:
The proposed amendments target improvements to the integrity of the tax system, consistent with the OECD’s 2016 best practice framework to protect against both base erosion and profit shifting, but they seek to do this in a balanced way that does not unduly impact the use of genuine debt in commercial activities that support investment and growth in the Australian economy. The amendments are estimated to increase revenue by $720million over the four years to 2025–26, as announced in the October 2022–23 budget.
Fixed ratio and group ratio tests
2.41Two of the broad amendments in Schedule 2 of the bill include the introduction of a fixed-ratio earnings-based test and a group ratio test.
2.42Under the fixed ratio test (which replaces the existing assets based safe harbour test), interest expenses will be limited to 30 per cent of an entity’s tax earnings before the interest, taxes, depreciation and amortisation (EBITDA) cap. Under the current thin capitalisation rules, deductions for all related-party and third-party interest costs that exceed the relevant thin capitalisation limit are disallowed. Under the proposed 15-year carry-forward rule, denied interest deductions would be allowed to offset against future income.
2.43Under the group ratio test, interest expenses would be deducted up to a proportion of the entity’s tax EBITDA that corresponds with the ratio of the worldwide group’s net third-party interest expense to EBITDA. The proposed group ratio test would replace the existing worldwide gearing asset based test.
2.44Gilbert + Tobin highlighted potential ramifications of the fixed ratio test as follows:
The fixed ratio test discourages Australian entities borrowing to fund overseas operations, including the acquisition of foreign subsidiaries. The use of a “tax EBITDA” means that non-assessable non-exempt income (ie. foreign dividend income) will not form part of EBITDA and therefore not increase the permissible debt deductions. Instead, to ensure worldwide operations are geared appropriately, multinational groups will borrow in overseas group entities to fund overseas operations.
2.45Deloitte argued that there is a need to avoid unintended consequences from the application of the test that may result in materially different tax results, particularly in relation to many common non-tax consolidated group arrangements and the treatment of prior year losses in the tax EBITDA calculation.
2.46In the specific case of the plantation forestry sector, AFPA recommended that the bill be amended to enable the sector to continue to utilise the current asset based safe harbour test (Balance Sheet Model) rather than the new tax EBITDA model for determining the quantum of debt deductibility.
2.47Articulating its support for the adoption of the fixed ratio test, Sonic Healthcare submitted:
Sonic is supportive of the change in approach in relation to thin cap, specifically the adoption of the fixed ratio test which allows an entity to claim an interest deduction up to 30% of its Australian tax EBITDA. This rule mirrors the approach adopted in the US, UK and Germany...
2.48Other submitters including CICTAR, TJN and Publish What You Pay commented the fixed ratio test could go further. In particular, they argued that the proposed 30 percent bracket was too high and that a lower ratio is preferred.Further, the organisations recommended to the committee that the provision that allows debt deductions of 15 years being carried forward should be removed, ‘as it does not curb profit shifting losses from government tax revenue but instead spreads those losses into future years’:
Carry forward of interest payments that exceed the EBITDA ratio should not be permitted, unless they are assessed by the third party debt test to be attributable to genuine third party debt which is used wholly to fund Australian business operations. The inclusion of a carry forward provision of excessive debt deductions of 15 years does not curb profit shifting losses from government tax revenue, it spreads the losses into future years. Thus, the carry forward provision does not address the stated aim of the legislation to address the significant risk to Australian Government revenue from excessive interest and debt deductions. If carry forward of excessive debt deductions is to be allowed, then the case is strongest for smaller corporations that can have volatility in an investment that carries higher business risk, such as the development of a mine. Thus, any carry forward provision should not be allowed for a significant global entities as defined under Subdivision 960-U of ITAA 1997.
2.49Public Services International also stated that the proposal to allow deductions of up to 30 percent of tax EBITDA, continues to support artificial tax minimisation measures and should be significantly reduced to reflect normal business practice (noting that the majority of businesses have interest expenses of less than 10 percent of EBITDA).
2.50Notwithstanding these suggestions to further amend the bill, CA ANZ submitted that it was content with changes made to the measure as a result of the exposure draft consultation process:
The provisions implementing the changes to the thin capitalisation rules and the fixed ratio test (i.e. an interest limitation rule based on 30% of tax EBITDA) have improved from the previous exposure draft legislation released on 15 March 2023.
CA ANZ is pleased that some of the recommendations in our submission on the exposure draft were accepted.
2.51Commenting on the group ratio test, Canadian Investors were of the view that it should be available to taxpayers within the same control group, regardless of whether accounting rules permit those entities not to prepare consolidated financial statements. They also raised the point that the approach proposed in the legislation differs from what has been implemented in other OECD countries, including the United Kingdom.
2.52The application of these proposed amendments to trust structures was also discussed. The Tax Institute and IFM Investors suggested that amendments be made to the thin capitalisation framework so that it would apply to trust groups under the same principles that apply to consolidated corporate groups. For example, IFM Investors argued that the fixed ratio test be amended to allow surplus debt capacity of a trust to be attributed to another trust in the direct or indirect ownership chain.
2.53SW Accountants & Advisors and the Property Council of Australia were also concerned that the fixed-ratio and group ratio tests would inappropriately apply to trust structures and that tests severely limit flexibility of where debt can sit at a downstream entity level or an upstream entity level.For example, Mr Mike Zorbas from the Property Council of Australia noted that:
Debt deductions arising in upstream vehicles will be denied access under those measures. Upstream debt is common where debt is sourced to finance a portfolio of assets or where debt is sourced to finance the acquisition of a property holding vehicle—so that is smack bang in the heart of a lot of property investment in this country.
2.54This view was also shared by the Canadian Investors who similarly argued:
The fixed ratio test should not differentiate between obtaining debt at an upstream entity level or downstream entity level, so long as the income of the relevant group is not supporting greater than 30% debt deductions. This will ensure that debt can be sourced at the commercially preferred level.
2.55Both the Property Council of Australia and Canadian Investors further argued that group ratio test as currently drafted is not appropriate and noted that it is a departure from the OECD recommendations. The Canadian Investors suggested that modifications to the group ratio test be considered to ensure that that global institutional investors which are classified as investment entities are able to access the GRT, an approach they argued, is consistent with the OCED’s recommended approach, as adopted by the United Kingdom.
2.56However, these concerns on the group ratio test were not held across the board. For example, CICTAR and TJN submitted:
We strongly recommend that the group ratio rule should be regarded as the primary rule for entities that are members of a relevant worldwide group, and if a fixed cap is offered as an alternative, it should be set low. Multinational enterprises (MNEs) should only be allowed to claim their actual interest expense to third parties as a tax deduction, no more and no less.
2.57In its evidence to the committee, Treasury outlined that the principal change of the thin capitalisation changes being the move from the existing assets base safe harbour to an earnings based test. Treasury advised that the changes:
…will better align Australia's thin capitalisation regime with the OECD's recommended approach under BEPS action 4. By limiting the amount of interest expenses that entities can deduct for tax purposes as a proportion of earnings, the new rules aim to create a tighter nexus between economic activity and interest expenses. This is given effect by giving limiting interest expenses to a percentage of tax EBITDA—that is, earnings before interest, taxes, depreciation and amortisation.
2.58Addressing the high-level discussion on the issue of trusts, Treasury articulated that amendments to the fixed and group ratio tests were being considered. In respect to recommendations in relation to the 15 year carry-forward rule, Treasury reassured the committee that the proposed changes were in line with those in other jurisdictions and that the carry-forward rule has had more variance among countries that have implemented it.
Third party debt test
2.59Schedule 2 also seeks to introduce a third-party debt test to replace the arm’s length debt test for general class investors and financial entities. In effect, the test would disallow an entity’s debt deductions to the extent that they exceed the entity’s debt deductions attributable to third party debt. The test is intended to operate as a narrow, streamlined test, to accommodate only genuine commercial arrangements relating only to Australian business operations.
2.60Some inquiry participants thought that the proposed third-party debt test could create uncertainty and have unintended consequences, and thus made suggestions to further refine the test.
2.61CA ANZ expressed doubts about the implementation of the test and noted that its application may not be straightforward in the case of a business structure with more than one entity —noting that an entity that is a general class investor may make a choice to apply this test instead of the fixed ratio test. CA ANZ argued that the drafting is ‘expected to cause practical difficulties and, in some cases, preclude access to the third-party debt test’ and suggested that practical guidance is required.
2.62Arguing that the third-party debt test is not a viable alternative to the fixed ratio test, Deloitte recommended that implementation of the test be deferred by 12 months so that any significant issues in its application can be resolved through further consultation. In the interim, Deloitte suggested that access to the existing arm’s length test should be preserved.
2.63Gilbert + Tobin were of the strong opinion that the conditions in the proposed section 820-427(3)(c) render the third part debt test unworkable in practice and will not provide the fallback that the government suggest it will provide. Gilbert + Tobin strongly recommended that the limitation to only Australian assets be removed, and a broader review of the test be undertaken.
The third party debt test…takes into account debt secured only by Australian assets. In a multinational group, third party lenders do not restrict security to particular jurisdictions (and it is our strong expectation that they will not modify their practices simply because of the proposed changes by the bill to the thin capitalisation rules); instead, they look for security across the entire group. Thus, even if third party debt could be limited to particular jurisdictions, it is unlikely that the relevant third party debt will be used by Australian entities to invest in foreign operations.
2.64The Australian Investment Council considered that there are unintended consequences for private capital funds with the proposed drafting and that these could be overcome with some minor tweaks without compromising the policy intent of the bill.
2.65While acknowledging that the bill relaxes some of the elements of the third-party debt test, Minter Ellison contended that some significant anomalies remain and that amendments should be made to clarify the operation of the test in the context of the provision of guarantees and credit support.
2.66Stakeholders from the property and infrastructure sectors also voiced their concerns that the scope of the test is not narrow enough and is inconsistent with standard third-party lending practices. As a result, it was argued that there would be a detrimental impact on the real estate sector. For example, the Property Council of Australia submitted that the breath of the current drafting constitutes an overreach and that use of genuine third-party debt deductions allows investment returns to remain competitive in the global market. Further, significant amendments need to be made to a range of different elements embedded in the base third-party debt and conduit financing provisions.
2.67INPEX Operations Australia (INPEX) highlighted its experience of funding infrastructure for gas and renewable energy projects, stating that these activities are characteristically tied to project financing from third party lenders which require parent company guarantees or letters of credit. INPEX submitted that the proposed test limitation will have an impact on project financing activities and would impede infrastructure investment as the exclusion of debt interest from satisfying the third-party debt conditions where there is recourse to forms of credit support is not reflective of commercial project financing arrangements.
If this limitation is not removed it will likely negatively impact the ability for companies to obtain project financing and undermine Australia’s ability to finance infrastructure investment, including renewable energy infrastructure. This appears to be an unintended consequence of the Bill, but its effect is concerning.
2.68At the same time, inquiry participants also suggested that the third-party debt test should be made available to trusts and partnerships, and raised concerns with the Australian residency requirement for the test.
2.69SW Accountants & Advisors submitted that the exclusion of trusts from the test appears to be an oversight of the bill and that amendments should be made to rectify this:
… the way in which the third party debt test is currently expressed, trusts are effectively precluded from accessing it. This is because the requirement in existing section 820-427A(3)(e) of the Bill that the entity issuing the debt interest be ‘an Australian resident’. An ‘Australian resident’ is defined in section 995(1) of ITAA 1997 with reference to the definition of a ‘resident of Australia for the purposes of’ ITAA 1936. Critically, the definition of ‘resident of Australia’ in section 6(1) of ITAA 1936 does not include a resident trust estate.
…there does not appear to be any reasonable policy or commercial basis to exclude trusts from access to the third party debt test in the new rules, that would preclude property trusts from reliance upon it. Indeed, such an outcome appears quite contrary to the stated intention of the third party debt test.
2.70A number of other submitters, including QIC, Pitcher Partners, CPA Australia and the Canadian Investors, agreed with this perspective and recommended that amendments be made to rectify the apparent drafting error. PitcherPartners submitted:
The rules should allow for Australian trusts and partnerships to satisfy the third party debt conditions. As currently drafted, only individuals and companies are able to satisfy these requirements as the provisions use the term Australian resident. This can easily be rectified by changing the term "Australian resident" to "Australian entity". We believe that this is a simple drafting error. It should not be the case that trusts and partnerships are excluded from the TPDT in a wholesale manner, particularly given the common use of trusts as highly leveraged property-holding vehicles that would be seeking access to the test.
2.71Remarking on the Australian residency requirement within the test, the Port of Melbourne commented that expansion of the test was necessary to enable a ‘trust to appropriately meet the conduit financier conditions while remaining consistent with the policy intention of only allowing access to Australian entities using borrowed funds for Australian businesses’.
2.72In a joint submission made to the committee, the Public Sector Investment Pension Board (PPSB) and the New Zealand Superannuation Fund recommended that the bill be amended to ensure that entities such as trusts and partnerships can access the third-party debt test to claim debt deductions for costs relating to genuine third-party debt where other relevant conditions are satisfied. Both organisations suggested that impacts on foreign investment would occur if amendments were not made:
The Foreign Funds have continued to invest in Australia on the basis that all forms of entities would be able to claim debt deductions for genuine third party debt and request the Senate Committee to review the deficiencies in the drafting of the Bill which would prevent this outcome should the Bill be legislated in its current form.
2.73IFM Investors outlined the possible consequences that the exclusion of trusts and partnerships would have on Australian infrastructure investments if the test remained unamended. Notably, it submitted that as trusts and partnerships cannot be considered Australian tax entities in their own right, the third-party debt test could not be applied, and they instead would be required to apply either the fixed ratio or group ratio tests. Accordingly, IFM Investors suggested the inclusion of a specific deeming provision to remedy this. Such provision could be drafted to ensure that Australian unit trusts and partnerships are eligible for the third-party debt test where the trustee or partners are Australian residents. Alternatively, it was suggested that residency conditions for subsidiary (trust and partnership) members of a tax consolidated group could be used.
2.74The Tax Institute argued that the exclusion of trusts would result in disproportionate and unfair outcomes for many common structures involving trust groups. It suggested that the test be broadened to make it clear that trusts and partnerships that are not foreign controlled are able to access the third party debt test. While the explanatory memorandum notes that some trusts and other non-consolidated groups may opt to simplify their operating structures (such as limiting the number of interposed trusts in their structure), significant tax and commercial costs associated with restructuring arrangements exacerbates the concern raised.
2.75Concerned that the test would provide little flexibility for groups entering third party financing arrangements via a conduit entity, BDO and Sonic Healthcare were not persuaded by the third-party test as currently drafted.In particular, Sonic Healthcare stated that its inability to use the third party test would ‘lead to a reduction in the amount of foreign acquisition debt that can be borrowed in Australia to support Sonic’s global expansion plans’.
2.76The Property Council of Australia and Property Funds Association of Australia also recommended that the thin capitalisation framework should apply to trust groups under the same principles that apply to consolidated corporate groups.The Property Funds Association of Australia explained the possible impacts on the sector and argued that the introduction of the rules be deferred by 12 months to allow time for trusts to restructure existing arrangements and comply with the new rules:
We consider the new thin capitalisation framework may disallow interest deductions for common commercial transactions involving trust structures. As such, the new rules would disproportionally impact the property funds sector and result in inequitable outcomes.
Trust group structures are generally used to acquire and hold real estate assets in the property funds sector. It is common for a property fund to use a trust structure where the borrowings are structurally separated in a holding trust, from the income producing real estate assets that are held in special purpose vehicle (SPV) trusts. The use of such a trust group structure is mostly driven by commercial and financial reasons. However, under the proposed new thin capitalisation rules, trust groups structured in this way may be denied interest deductions for what are common commercial arrangements.
2.77Notwithstanding the above concerns raised and suggestions regarding the implementation and application of the third-party debt test, some submitters expressed strong support for the proposed new test. CITAR and TJN articulated their support as follows:
We welcome that the external third-party debt test will replace the existing arm’s length debt test for ‘general class investors’ and financial entities. We welcome that a general class investor and all of its associate entities must make a mutual choice to use the third party debt test... We agree the safeguard is needed to ensure that general class investors and their associates are not able to structure their affairs in a way that allows them to artificially maximise their tax benefits by applying a combination of different thin capitalisation tests.
2.78Infrastructure Partnerships Australia submitted that the test is critical to the delivery of major infrastructure projects and encouragement of foreign investment in Australia. It stated that any intention to abandon or reduce its use would ‘have a serious negative impact on the costs for all levels of government to access private sector capital…to deliver Australia’s critical social and economic infrastructure’.
2.79Treasury outlined the rationale for the replacement of the existing arm’s length test with the third-party debt test as follows:
The third-party debt test reflects the considered policy decision to replace the existing arm’s length debt test. Under the third-party debt test, interest expenses from related-party debt are generally excluded from being deductible for tax purposes to manage the elevated integrity risk…The third-party debt test is specific to the Australian context. It reflects the fact that the earnings nexus can be blunt for sectors that are asset intensive and tend to have longer investment horizons, where the entity may be in a tax loss position but has interest expenses.
2.80In its evidence to the committee during the public hearing, Treasury acknowledged some unintended consequences had become apparent in the way the provisions have been drafted for the third-party debt test. Treasury outlined that it is continuing to engage with stakeholders, including from the property sector, to work through concerns and advised the committee. Treasury advised that a number of minor technical amendments would resolve key issues that had been raised, including making clarifications to the Australian resident requirement so that the test applies to trusts that may have been ‘inadvertently excluded’ in the drafting of the bill.
Debt deduction creation rules
2.81Subdivision 820–EAA of the bill seeks to directly address the risk of excessive debt deductions by disallowing debt deductions to the extent that they are incurred in relation to debt creation schemes that lack genuine commercial justification. The proposed new amendments are consistent with Chapter 9 of the OECD’s BEPS Action 4 Report, which recognises the need for supplementary rules to prevent debt deduction creation. Subdivision 820–EAA would only apply to entities that are subject to the thin capitalisation rules and are not exempt from those rules under Subdivision 820-35. This broadly means that the rules would only apply to entities that are part of a multinational enterprise and have total debt deductions of over $2 million for the income year. There was some discussion by inquiry participants on the scope of the proposed new rule as well as stakeholder engagement on the measure.
Scope of the debt deduction creation rules and stakeholder engagement
2.82A number of inquiry participants opposed the current scope of the proposed debt deduction creation rules arguing that it is too broad and would lead to a number of unintended consequences and negative outcomes for Australian companies. The primary recommendation from inquiry participants was that the debt deduction creation rules be deferred so that further stakeholder engagement could be undertaken prior to implementation.
2.83For example, CPA Australia commented that the ‘extremely broad scope’ of the proposed rules ‘go far beyond the stated purpose of attacking debt creation schemes that commercial justification’.
2.84This view was shared by the Port of Melbourne which considered that the ‘potentially extremely broad rules’ should apply prospectively so that existing third party debt is recognised.
2.85Further, King and Wood Mallesons and QIC commented that the current drafting represents a broad ‘catch-all’ which has a much broader scope than the BEPS Action 4 Report and stated objectives in the EM.
2.86Recommending that the rules should be deferred to determine an appropriate scope, the Property Council of Australia were of the view that the proposed rules would apply to very common restructure and refinancing arrangements in circumstances where there appears to be no mischief that is being targeted.
2.87The Financial Services Council (FSC) had similar views, commenting that although the explanatory memorandum states that the rules are intentionally drafted to apply to schemes of varying complexity, the rules have significant reach beyond the stated policy intent. The FSC highlighted that, among other things, the rules as drafted are likely to deny debt deductions for many common and simple commercial transactions, do not appear to distinguish between the artificial ‘creation’ of additional debt as opposed to the genuine funding of the expansion of an entity’s business capacity via the acquisition of business assets, and will have practical compliance issues for taxpayers.
2.88The Australian Financial Markets Association (AFMA) submitted that the due to the current broad scope, the debt deduction creation rules ‘have the potential to apply detrimentally to commercial transactions that have no purpose or effect of inflating debt deductions’. The Canadian Investors shared this view stating that the rules appear to capture a wide variety of arrangements which are not ‘debt deduction schemes’.
2.89The Tax Institute raised concerns that the rules may unintentionally and unfairly apply to common and low risk arrangements, as well as those in place prior to 1 July 2023. It was argued that this approach would ‘impose a significant compliance burden on taxpayers’ and that the ‘outcome would be disproportionate to the intended purpose of the rules’.
2.90Some submitters, such as PKF, BDO and Infrastructure Partnerships Australia, noted that the debt deduction creation rules should have a principal purpose test to ensure that the measure is appropriately targeted and only applies to purely domestic arrangements. On this point, Infrastructure Partnerships Australia submitted:
The Explanatory Memorandum states that the purpose of the debt creation rules is to disallow debt deductions in relation to arrangements that “lack genuine commercial justification” or involve the creation of “artificial interest-bearing debt”. However, the drafting of the bill does not make any reference to these concepts, nor are there any purpose-based tests (other than in the related anti-avoidance rule) in the bill to reflect these apparent aims.
…
We respectfully submit that any debt creation rule… should be drafted to include a clearly worded purpose test to ensure its application is appropriately targeted.
2.91The Property Council of Australia agreed with this perspective noting that ‘most tax integrity measures of this nature (and as matter of good policy design, should) include a purpose test’.
2.92Perpetual Limited, CA ANZ, CPA Australia, the Australian Banking Association (ABA) and Infrastructure Partnerships Australia, among other stakeholders, were concerned that the new rules are unnecessary and contained no comparable sensible exemptions to the rules contained in the former Division 16G of the Income Tax Assessment Act 1997 (ITAA 1997). The FSC and Perpetual Limited argued that the new rules were not a modernised version of the former Division 16G rules, may have inadvertent consequences, and that clarification and refinement was required. The organisations were of the view that the reintroduction of the ‘very broadly drafted rules’ was surprising, particularly after their repeal from the ITAA in 2001 (post Ralph Report) and suggested that they be removed from the bill.
2.93The American Chamber of Commerce in Australia sought clarity as to the policy basis for the introduction of the new debt deduction creation rules, given other changes to the thin capitalisation rules and argued that they be removed from the bill. They similarly argued that the proposed rules go beyond the former 16G ITAA rules and that tailored safeguards should be included within the bill so that the ‘rules target the potential mischief without indiscriminate damage’.
2.94Perpetual Limited contended that should the debt deduction creation rules remain in the bill with effect from 1 July 2023, consideration should be given to grandfathering existing arrangements. Submitters including Deloitte agreed with this suggested approach, stating that as the measure includes previously unannounced debt deduction creation rules, more time was needed to adequately address any issues.
2.95The ABA noted that, while it was supportive of the policy intent of the bill and tax integrity measures, at a minimum, exemptions for authorised deposit-taking institutions were required. Further, the ABA was concerned that the rules, as currently drafted, would impact banks’ ability to obtain wholesale funding at an efficient cost, and this would in turn may have flow on effects such as raising the cost of borrowing funds for customers. Treasury acknowledged these concerns raised by the ABA during the public hearing and reassured the committee that continual efforts were being made to engage with industry groups, particularly the Securitisation Forum and the ABA, to address unintended potential impacts.
2.96The Corporate Tax Association stated that the lack of consultation on the proposed debt deduction creation rules is reflected in their broad scope.
2.97Some stakeholders, including the Law Council of Australia, AFMA, Deloitte, CA ANZ, Pitcher Partners, Property Council of Australia and Perpetual Limited, advocated for further consultation on the rules. The consensus view of these inquiry participants was that it would be premature to include the debt deduction creation rules in the bill at this point in time. Other stakeholders also felt that the inclusion of the rules in the bill were a surprise. They argued that there had been no opportunity for genuine consultation, and thus sought more clarity on the policy position underlying the bill.
2.98On the inclusion of subdivision 820–EAA in the bill, AFMA noted that they were not a part of the exposure draft consultation, submitting:
The process undertaken falls significantly short of the standards articulated in the Guidance Note issued by the Office of Impact Analysis in May 2023 regarding consultation best practice and our view is that it would be inappropriate for the proposed debt creation rules to be legislated without proper consultation.
2.99Similarly, the ABA submitted:
We express our significant concern with the lack of consultation on the Debt Deduction Creation Rules and with the mechanism by which these amendments have been brought before the... Committee… a change of this nature and magnitude requires extensive consultation.
2.100The Corporate Tax Association stated that Australia must maintain an approach to tax policy formulation that ‘encompasses early, transparent, constructive engagement with taxpayer stakeholders’, otherwise the longer-term ramifications would be far greater than attempts to raise revenue.
2.101CA ANZ questioned the need for the inclusion of the rules within the schedule and commented that their inclusion, despite the lack of a Treasury consultation process to date, ‘has resulted in legislation which lacks clarity and will impede commercial transactions which are not motivated by a desire to reduce tax liabilities’.
2.102CICTAR, TJN and the ACTU, among other submitters, strongly disagreed with the above perspectives and advised the committee that they were content with the consultation process. In particular, the ACTU voiced a strong view that the process of conducting a Senate inquiry is consultation, that concerns regarding multinational tax have been raised for years and that companies have substantial resources and advice available to ensure that tax obligations are met. In relation to the inclusion of the debt deduction creation rules within the bill, Mr Joseph Mitchell from the ACTU told the committee:
I think that it's really important to note that, with any new provisions that the government might introduce in this bill, this process is an adequate opportunity to make a contribution, which is what we're doing. We're participating in the same level of consultation, probably not with the same amount of resources, as some of these multinationals have participated in.
2.103Despite raising its concerns on the debt deduction creation rules and lack of prior consultation on this matter, Perpetual Limited agreed with important role of the Senate Committee inquiry process in providing stakeholder feedback on the proposed amendments:
…we’ve now had the opportunity to put our position and we do believe in the value of consultation to ensure that legislation acts in the way it is intended to act. So we are pleased that we’ve been able to put our position today.
2.104In its evidence to the committee, Treasury highlighted the rationale for, and inclusion of, the debt deduction creation rules within Schedule 2 of the bill. Treasury noted that the rules are intended to target the artificial creation of debt in order to generate additional deductions where there is not a strong commercial underpinning for the creation of the debt. Mr Marty Robinson from Treasury explained:
When we drafted the current debt deduction creation law, we drafted it with a view to other guidance and perhaps changes in legislation that have occurred since the original rules were in place. To give you an example, one of the scenarios that was pointed out to us by stakeholders and that they identified as potentially problematic was in relation to the treatment of cash, including notes and coins, and if it was acquired as legal tender that consideration received by a vendor in selling an asset would be captured by the debt deduction creation rules. That was based on a pretty flat reading of the provision as drafted, but I guess, when we thought about it, it was with a view to a longstanding ATO determination of tax determination 2002/25 that cash in such instances is not considered to be a CGT asset. We would acknowledge, though, that there is possibly some benefit in including particular carve-outs like that, which essentially clarify the operation of the rules within the actual provision, rather than relying on other guidance and advice elsewhere in the tax system.
2.105Elaborating on the need for the rules to address artificial debt creation and the views of the tax advisory community, the ATO told the committee:
… we are aware of views in the tax advisor community that the absence of the debt creation laws since 2001 actually allowed for debt creation schemes to take place in a way that we can't otherwise address without these rules, so there's evidence of it in the past.
2.106Treasury addressed the concerns discussed above regarding the scope of the debt deduction creation rules, acknowledging that the current drafting is broader in application than originally intended. Treasury added that work was being undertaken with the Australian Taxation Office (ATO) and stakeholders to consider how amendments could potentially be made. In response to concerns regarding the original provisions in section 16G of the ITAA 1997 that applied prior to the current thin capitalisation rules and specific carve-out exclusions for certain types of commercial activities from the debt deduction creation rules, Treasury recognised that there would be some benefit in including certain exclusions which would clarify the operation of the rules. Further, Treasury reassured the committee that technical amendments could be modelled on the former 16G ITAA 1997 exclusions and other further technical amendments to the bill are being explored.
2.107In relation to concerns raised regarding stakeholder engagement on the proposed debt deduction creation rules, Treasury reassured the committee that a consistent approach to consultation on these changes has, and continues to be, undertaken as it would do with any changes in the tax system. Treasury further added that stakeholder engagement has continued following the introduction of the bill.
Commencement date
2.108There was some discussion among stakeholders regarding the proposed commencement date of the proposed thin capitalisation rules of 1 July 2023. In this regard, stakeholders made suggestions including that consideration be made to deferring the application date for reasons which are outlined in more detail below.
2.109The Law Council of Australia, BDO, PKF and QIC, among other stakeholders, argued that the thin capitalisation provisions should not apply retrospectively. It was contended that changes be made to ensure that the rules only apply to new debt entered into after the commencement of the legislation and that the commencement date should be deferred to allow for more time to consider the effect of the proposed changes. Encapsulating some of these views, the Law Council of Australia submitted:
Given the extensive nature of the changes to the current thin capitalisation rules contained in the Bill...the commencement date should be changed from 1 July 2023 to a later date. The absence of transitional rules or grandfathering rules could have significant negative consequences for long-dated investments made on the basis of law existing at the time of investment, noting in particular that tax is an economic factor that goes to the value of an investment and would have been considered at the time of the investment based on then existing laws.
2.110Deloitte and SW Accountants and Advisors both recommended that the start date should be pushed back by 12 months to 1 July 2024 so that there would be no retrospective application:
Although we acknowledge that the proposed changes were announced in the October 2022 Budget, the Bill contains significant differences both relative to the announcement and also from the Exposure Draft that was released on 22 June 2023.
2.111The Property Council of Australia, the Property Funds Association, and Infrastructure Partnerships Australia also supported deferral of the bill by a minimum of 12 months and application to income years commencing on or after 1 July 2024. This would, they argued, allow transition time for restructuring arrangements to take place, time to understand the new rules and for appropriate adjustments for compliance costs to be made. In addition, Infrastructure Partnerships Australia suggested that a three-year transition period should be available for existing infrastructure projects to comply with the new rules.
2.112King and Wood Mallesons agreed that a transitional period is required, submitting that the provisions ‘should allow for appropriate reorganisation of arrangements to meet the new legislative requirements without the risk of anti-avoidance rules applying’.
2.113QIC shared this view, stating that deferral was necessary due to the broad and significant impacts of the measure and that a transitional period as well as grandfathering is required.
2.114In relation to the suggestions raised above, Treasury provided evidence to the committee on the broader grandfathering or transitional issues. Treasury explained that the application of the measure only to new debt going forward would add a great deal of complexity to the system not only in terms of the legislation and drafting, but from a compliance perspective for taxpayers and the ATO. Further, Treasury outlined its concern that this would require entities to track debt under two different regimes, which would be a complex undertaking.
2.115The potential issue of competitive neutrality was also a key point raised in relation to suggestions regarding prospective application of the bill. Treasury explained that such an approach would have entities, such as startups, taking on debt subject to the new more stringent thin capitalisation regime. Incumbent and other existing entities, on the other hand, would be operating under the more generous provisions of the current regime.
2.116Addressing recommendations that a transition period be implemented, Treasury assured the committee that there would be suitable time for entities to adjust to the new arrangements. Mr Marty Robinson provided the following advice to the committee:
In terms of transition, we appreciate that, for some entities, they will be seeking to, for example, restructure debt to be compliant with the new rules. That's probably not unusual in terms of major changes that affect structuring or the way business funds or undertakes activities. That's something that could be considered. I would also make the point that, essentially, the changes commencing from 1 July 2023 would only need to be reported in tax filings for the 2023-24 financial year, which, for ordinary June balances, would not be until later in 2024. So there is also time for entities to make appropriate changes accordingly.
Consultation on Schedule 2
2.117Treasury undertook consultation processes in relation to the exposure draft legislation and accompanying explanatory material for Schedule 2 of the bill. As outlined above, some stakeholders raised concerns with the consultation process and feedback received to inform any changes particularly in relation to the proposed debt deduction creation rules.
2.118At the same time, stakeholders acknowledged and welcomed amendments made to tighten the bill based on feedback on the exposure draft during consultation processes undertaken by Treasury. The Corporate Tax Association and Deloitte similarly commented:
We commend the Government for addressing some of the concerns expressed with the initial Exposure Draft (ED) on the thin capitalisation changes, particularly the announcement to deal with the potential removal of section 25-90 via a separate consultation process.
2.119The FSC expressly thanked the government for its engagement and for taking onboard the feedback provided by the FSC in its submission during the consultation period.
2.120In terms of the consultation process on the new provisions and on the bill overall, CICTAR noted that the bill has gone through a series of consultations to date, and that stakeholders have had an opportunity to speak to the issues on multiple occasions.
2.121Treasury explained the ongoing and tailored consultation process on Schedule 2 of the bill, as well as intentions to make further amendments to the bill following the inquiry:
…Treasury has consulted extensively on the changes. This includes public consultation and a discussion paper in August 2022 followed by extensive engagement with industry since the release of the exposure draft legislation in March 2023 and continued engagement following the introduction of the bill. The thin capitalisation rules in division 820 are inherently complex, and incorporating the new interest limitation rules into the existing framework is a technical undertaking. The process to date reflects a fairly standard consultation process with multiple interaction points to work with stakeholders to modify technical elements of the bill.
Our work with industry stakeholders has identified a number of unintended consequences with the bill… I would just note that the government has been consistent in signalling its intent to progress target integrity rules to support the effective implementation of the core thin capitalisation amendments. The intention is not to limit genuine commercial debt but rather to limit an entity's use of artificial debt to increase debt levels beyond ordinary commercial levels.
Committee view
2.122The committee would like to thank all the stakeholders who took the time to submit to the inquiry and appear at the public hearing.
Schedule 1: Multinational tax transparency—disclosure of subsidiaries
2.123The committee welcomes the strong support for the intent of Schedule 1 of the bill to increase the transparency of company structuring arrangements. This important disclosure measure will enhance the public scrutiny of how public companies operate in Australia by removing discretion around what is, or is not, included in financial reporting.
2.124The committee is of the view that ensuring that this information is in the public domain will facilitate an informed discussion of tax compliance—helping build trust in the integrity of the tax system. The committee is persuaded by evidence received that increased public scrutiny has a direct impact on aggressive tax avoidance strategies by reducing corporate incentives in this area.
2.125Increased tax transparency can help to deter corporate entities from entering into arrangements to minimise their tax paid by ‘holding companies to account’ on their activities in a jurisdiction. This contributes to the welfare of Australian society. The committee is of the strong belief that enhanced public scrutiny and tax transparency allows for a better assessment of taxpayer activities and the impact of those activities on the economy, including the amount of tax paid.
2.126The committee strongly believes the proposed changes are a vital tool to ensure that multinational enterprises are paying their fair share of tax. The committee is satisfied that Schedule 1 of the bill, which is consistent with the approach taken in other jurisdictions, will restore and maintain community trust in the tax system. Stronger laws and more transparency are required to secure a better economic future for Australia.
Schedule 2: Thin capitalisation
2.127The committee welcomes the government’s commitment to address the conduct of large multinational corporations reducing their tax obligations in Australia by using debt to generate interest deductions. It is important that the Government has done this in a way that does not restrict the use of genuine debt by companies.
2.128The committee is encouraged by evidence that these measures to reform thin capitalisation rules will improve the confidence that Australians, multinational corporations, and investors have in Australia’s tax system which underwrites the essential services that support and grow the Australian economy.
2.129Additionally, the committee welcomes the work of the government to align with OECD counterparts in progressing the Two-Pillar Solution for international corporate tax. The committee welcomes continued efforts from the government to pursue further measurers to increase tax transparency and integrity.
2.130The committee agrees with calls from inquiry participants who have demonstrated that the thin capitalisation framework is one of the systems most susceptible to profit shifting. This bill is required to stop the use of excessive interest related debt deductions and contrived deductions that entities can utilise for tax minimisation purposes.
2.131The committee notes evidence from submitters welcoming the benefit of these changes, and thanks submitters for their work proposing options for the government to improve the remit and application of the bill. The committee is particularly pleased that Treasury is addressing this feedback, including consulting with stakeholders on technical amendments to thin capitalisation rules so they better accommodate trust structures, and the function of debt deduction creation rules and the critical anti-avoidance impacts they will have.
2.132The committee is reassured by the lengthy and ongoing process of consultation that Treasury has undertaken with stakeholders and its acknowledgement that further technical amendments are required.
2.133The committee is confident that the proposed measure, which is consistent with the Organisation for Economic Cooperation and Development’s best practice framework rules, will deter multinationals from avoiding income tax while balancing tax settings to support continued investment in Australia.
2.134The committee recommends that Schedule 1 of the bill be passed unamended.
2.135The committee recommends Schedule 2 of the bill be passed subject to technical amendments foreshadowed by Treasury.
Senator Jess Walsh
Chair
Labor Senator for Victoria