‘Thinly capitalised’ companies tend to be highly geared, with their capital consisting predominantly of debt.
The practice can prevent the Australian Taxation Office from collecting tax from companies if they deduct large amounts of debt from their tax bills.
There are already thin capitalisation rules in Australia that prevent companies from making debt deductions if their debt is beyond a certain threshold.
But the proposed new measures will tighten the debt limit settings to “more closely align with commercial debt levels”, according to a Treasury statement.
The amendments in the draft legislation will also “increase the de minimis threshold from $250,000 to $2 million to minimise compliance costs for small businesses”.
The measures will also introduce a test for inbound investors to allow gearing of Australian operations up to the level of gearing of the worldwide group.
Finally, the draft legislation proposes to “reform the exemption for foreign non-portfolio dividends to address integrity issues”.
Submissions on the exposure draft close on Friday 6 June.
