PwC TaxTalk - War on debt podcast

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Welcome to our series of audio podcasts following the recent Federal Budget, designed to provide you with further detail around hot topics arising from the night. In this audio podcast, Simon discusses the specific measures outlined in the recent Federal Budget, which we expect to result in significant Tax Controversy activity in the coming months and years.

Specifically this podcast focuses on: expected higher ATO compliance activity due to the funding increases secured by the ATO in the budgetthe targeting of corporate restructures that facilitate profit shifting opportunities from Australia to offshore jurisdictions, and which will now be the subject of specific and aggressive compliance checks on offshore marketing hubs and international restructurestrust structures, which are an area of concern for the ATO and Treasury due to their perceived ability to facilitate tax avoidance, andthe greater scrutiny taxpayers can expect around data matching, due to $77.8 million being provided to the ATO to improve compliance in this area.Resulting from these measures, activity by the Australian Taxation Office could include comprehensive risk reviews, audits, and eventually, significant disputes that end up in the Courts.

Podcast: Listen to this podcast.

Following the speculation in the lead up to the Budget, the government officially announced that it will make changes to the thin capitalisation regime which limits deductions available for interest (and other defined debt deductions) for certain inbound and outbound investors. Specifically, the government has announced that it will: reduce the “safe harbour” debt limit for general entities from 75 per cent to 60 per cent of adjusted Australian assets (from 3:1 to 1.5:1 on a debt to equity basis), the effect of which could be to reduce interest deductions by up to 20 per cent reduce the “safe harbour” debt limit for non-bank financial entities from 20:1 to 15:1 on a debt to equity basisincrease the “safe harbour” minimum capital for banks from four per cent to six per cent of the risk weighted assets of their Australian operations reduce the “worldwide gearing ratio” from 120 per cent to 100 per cent and make it available to inbound investors, and increase the de minimis threshold from $250,000 to $2 million of debt deductions.In addition, the government announced plans to reign in significant tax concessions available to Australian resident companies investing overseas. This includes narrowing the income tax exemption for certain dividends received from foreign companies and removing the ability to deduct interest expense incurred in relation to foreign investments. The two proposed amendments, in conjunction with each other, are likely to have a significant impact on the tax position of multinational enterprises based in Australia and are part of a package of recent moves by the government to address their perception of so-called base erosion and profit shifting by multinationals in Australia.

These measures, in conjunction with the tightening of the thin capitalisation limits, are expected to save $1.5 billion over the forward estimates.

Podcast: Listen to our audio podcast on these issues.