ATO homes in on thin capitalisation for justified trust reviews

The ATO has outlined its compliance approach in relation to the new thin capitalisation rules for 100 and top 1,000 taxpayers.

The Tax Office said the thin capitalisation and debt deduction creation rules were likely to have a significant impact on the affairs of some taxpayers.

“The application of these new rules will be a key focus area of our Top 100 and Top 1,000 justified trust compliance and assurance programs when we review years where the new rules apply,” the ATO said.

“Justified trust gives the community confidence that large businesses are paying the right amount of tax.”

The ATO said it would engage with those in the programs and be subject to a justified trust review to help in understanding the impact of the new thin capitalisation and debt deduction creation rules could have on affairs.

If included in this group, taxpayers could expect to be asked for information from the ATO that is relevant and tailored to their individual circumstances, having regard for reporting already provided.

The ATO said on a broad scope, the information it commonly required or asked for included calculations and working papers that supported reported thin capitalisation and debt deduction creation rules and a copy of the signed and dated approved form for entities that had chosen to apply the third-party debt test or group radio test.

The “approved form” refers to the choice made when applying to the group ratio test or third-party debt test pursuant to Division 820 of the Income Tax Assessment Act 1997 for an income year.

This choice is referred to by the ATO as a thin capitalisation test choice. A choice should only be made on the approved form and would only apply in relation to the nominated income year.

The ATO said it had improved confidence that Australia’s largest taxpayers were effectively complying with the new thin capitalisation rules by helping them understand their circumstances.

The reviews were usually undertaken by the Tax Avoidance Taskforce, the ATO added.

“The Taskforce plays a critical role to ensure multinational enterprises, large public and private businesses, and wealthy individuals pay the right amount of tax in Australia.”