Money
Issue No. 3 - December/ 2001/january
taxing times
CHANGES TO THIN CAPITALISATION REGIME WELCOME NEWS FOR BUSINESS
Australian companies seeking to borrow funds for overseas expansion will welcome a relaxation in the Federal Government’s revised thin capitalisation regime.
Thin capitalisation is the practice of multinational companies allocating a greater proportion of debt to their operations in a particular country, because of the more favourable tax treatment of debt compared to equity.
The Government’s amendments to the thin capitalisation legislation exclude many Australian-based medium-sized and family businesses from the proposed rules.
Amendments were made to the legislation in Federal Parliament in the week of September 24.
In the original regime proposed earlier this year, any Australian-owned company with an overseas subsidiary, however insignificant the subsidiary, could have been subject to the rules.
However, under the amended legislation, Australian-based businesses whose foreign assets represented less than 10 percent of total assets would be exempt from the thin capitalisation rules.
This will significantly reduce the compliance burden for Australian businesses with relatively small foreign operations.
The amended legislation would also extend the availability of concessions for equity and debt interests in associate entities, by broadening the concept of ‘associate entity’ in the rules.
For example, this amended legislation may prevent finance companies associated with joint ventures from being unfairly subjected to the thin capitalisation rules.
In addition to legislative amendments governing thin capitalisation, the Federal Government has relaxed rules applying to the classification of debt and equity for tax purposes.
Under the changes, existing hybrid financing instruments will not be subject to the debt/equity rules until 30 June, 2004, unless the issuer ‘opts-in’ to the new rules....
