As part of the 2022-23 Budget, an integrity measure was announced to address risks to Australia’s domestic tax base stemming from the use of excessive debt deductions. This measure strengthens Australia’s thin capitalisation rules in line with the Organisation for Economic Cooperation and Development (OECD)’s best practice guidance.
The government has just released exposure draft legislation giving effect to this measure, which replaces the existing asset-based thin capitalisation rules with new earnings-based rules for certain entities.
Additionally, the arm’s length debt test, referred to as an external third-party debt test in the draft legislation, will be available for most entities claiming debt deductions on their external third-party debts.
