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Australia Releases Draft Thin Capitalization Rules for Public Comment — Orbitax Tax News & Alerts

On May 8th 2014, the Australian Treasury released draft legislation for public comment relating to changes to Australia's thin capitalization rules. The legislation provides for the following changes:

  • A reduction in the safe harbor debt to equity ratio from 3:1 to 1.5:1 for general entities, and from 20:1 to 15:1 for non-bank financial entities
  • A reduction in the worldwide gearing ratio test for outbound investment from 120% to 100%
  • An increase from 80% to 100% for the worldwide capital ratio for authorized deposit-taking institutions (ADI)
  • An increase in the safe harbor capital limit for ADIs from 4% to 6% of their risk weighted Australian assets
  • The de minimis threshold for the application of the thin capitalization rules will be increased from debt deductions of AUD 250,000 to debt deductions of AUD 2 million
  • A worldwide gearing ratio test will be introduced for inbound investment

The thin capitalization changes are proposed to apply from 1 July 2014. The closing date for comment submission is 6 June 2014.