The professional body has called on the ATO to adjust incoming third-party debt test requirements, citing concerns that the proposed conditions are overly restrictive.

CA ANZ has said the ATO is taking an unnecessarily restrictive view on certain third-party debt conditions, including the classification of “minor or insignificant” assets, and requirements determining commercial activity in Australia.

CA ANZ’s submission aligns with recommendations given by CPA Australia, which similarly took issue with the restrictive nature of the third-party debt test (TPDT).

“Even where a taxpayer’s circumstances should allow them to qualify for the TPDT, the evidentiary burden imposed by the ATO makes it practically unworkable unless significant pre-planning measures were taken,” Jenny Wong, tax policy lead at CPA Australia, wrote in a recent submission.

CA ANZ argued that the ATO’s view of a “minor or insignificant” asset does not align with commercial realities. The accounting body said that assets should be evaluated relative to a company’s total value, not in an absolute sense.

It suggested that a “minor” asset should include those less than 5 per cent of all assets subject to recourse.

“We believe that the legislative intent is that where the relevant assets have had little or no impact on the quantum of the debt issued, or its interest rate pricing, then the assets in question are minor or insignificant,” CA ANZ said in the submission.

“Accordingly, the test is not absolute but relative to its impact on whether or not more deductions are being claimed in Australia than would otherwise be the case.”

The accounting body also called on the ATO to include capital management activities when evaluating commercial activities in connection with Australia. The TPDT seeks to establish whether third-party debt has been used to fund commercial activity in Australia, but capital management activities are currently not included under the ATO’s criteria.

“Capital management activities are an important part of operating a business to ensure a business has sufficient cash flow to meet its short-term operating costs and debt obligations and should be classified as commercial activities of a business in connection with Australia,” the submission said.

CA ANZ also made a series of recommendations to improve the practical application of TPDT compliance operations.

It said the ATO should allow more time for taxpayers to choose to apply for the TPDT, allow taxpayers to amend returns after they have been lodged to apply the TPDT and allow taxpayers to revoke TPDT choices.

This is because, as the ATO releases new guidance on the TPDT, companies may realise they can access the third-party debt deductions and wish to apply the TPDT. Alternatively, companies may realise they do not fit the requirements and seek to withdraw their TPDT choice, CA ANZ said.

Alongside its recommendations, CA ANZ commended the ATO’s decision to administratively provide a transitional compliance approach to applying third-party debt conditions for affected entities, given the late enactment of legislation changing thin capitalisation rules.