Australian tax office planning release of thin cap guidance

The Australian taxation office (ATO) has announced that it intends to soon complete five guidance projects on Australia’s thin capitalization regime.

In a February 28 update, the ATO advised that it will issue draft practical compliance guidelines by June 29 outlining its compliance approach to thin capitalization issues, addressing asset recognition, valuation and revaluation, and application of the arm’s length debt test.

A second project, a draft tax determination, will consider whether, for purposes of the income tax, a mining, quarrying or prospecting right can be revalued in determining the safe harbor debt amount under Division 820 of the Income Tax Assessment Act 1997 (ITAA 1997). This project is expected to be complete April 30.

A draft tax determination on bifurcation of financial instruments, expected to be released April 30, will address whether a taxpayer can value their debt capital in accordance with the accounting standards for the purpose of the thin capitalization rules.

Also, an ATO draft tax determination will assess whether a taxpayer can recognize and revalue their internally generated intangible asset in accordance with the accounting standards for the purpose of the thin capitalization rules. The expected completion date for this project is June 29.

Finally, a draft tax ruling on the application of the thin capitalization rules to arm’s length debt test which was registered in July 2016 is expected to be complete on June 29, the ATO said. 

The ATO also announced that several tax guidance projects will take longer than previously expected. A project on corporate residency, namely, Australia’s central management and control test, is now expected this month. Draft guidance on the MAAL defining ‘directly in connection with the supply’ is now expected April 30  Both projects were originally scheduled for release in February.

Further, two guidance projects on related party financing  — one dealing with derivatives and another dealing with interest-free loans –have been extended until June 29.