ATO must take ‘pragmatic’ approach to thin cap changes, says CA ANZ
CA ANZ is calling on the ATO to apply a practical approach to retrospective compliance issues arising from the thin capitalisation changes with the government committed to the 1 July 2023 start date.
CA ANZ is urging the government and ATO to take a pragmatic approach to compliance issues that arise from the thin capitalisation changes in the 2023–24 income year with the bill still yet to be passed despite the 1 July 2023 start date.
The multinational tax integrity and transparency bill amends the thin capitalisation rules to limit the amount of debt deductions that multinational entities can claim in an income year.
The bill to implement the changes was referred by the Senate to the Senate Economics Legislation Committee in early December for inquiry and report by 5 February.
This means the bill will not be considered further until Parliament sittings commence on 6 February 2024, CA ANZ noted in a recent submission.
By the time the Bill receives Royal Assent, at least eight months will have passed since 1 July 2023, the start date for the thin capitalisation changes, except the debt deduction creation rules (DDCR), the accounting body said.
“To provide certainty to taxpayers and to uphold a properly functioning legislative process, the Joint Bodies are of the strong view that the application date should be deferred to income years commencing on or after 1 July 2024,” said CA ANZ.
“However, we acknowledge that the government is committed to the currently proposed application date for the thin capitalisation changes from 1 July 2023 and the forecasted revenue from these changes may have already been allocated.”
If the application date for the thin capitalisation changes is maintained as 1 July 2023, CA ANZ said its key concern is concerning the transitional period.
“Our members have expressed deep concern that taxpayers have had to anticipate the law during the past six months from 1 July 2023 and continue to do so until the enactment of the Bill,” said CA ANZ.
“Entities that have applied the law as enacted in managing their tax affairs may find themselves in a historically non-compliant position once the Bill is enacted.”
Due to the ongoing amendments to the bill, the submission said that even entities that have sought to comply with the proposed changes in planning and forecasting the expected tax outcomes on new or existing financing arrangements may also find themselves in a historically non-compliant position.
“This is costly and difficult for taxpayers to rectify and causes an undue burden on the administrator,” the submission said.
“In this regard, the funds management industry is acutely impacted as managed funds have had to use their best endeavours to anticipate the changes to the thin capitalisation rules in making interim trust distributions relied upon by investors.”
CA ANZ said it will be crucial for the ATO to work pragmatically with taxpayers who have incorrectly anticipated the law during this prolonged period of uncertainty.
The accounting body said it was pleased that the amendments made to the original multinational tax bill had addressed some of the concerns raised by industry.
This includes amendments allowing an entity to access excess tax EBITDA in other legal entities and not just eligible unit trusts and managed investment trusts.
The accounting body has also welcomed the deferral of the application of the debt deduction creation rules to income years starting on or after 1 July 2024.
“[However], we have ongoing concerns regarding the the application date of the thin capitalisation changes (being from 1 July 2023) which means that entities have been and will continue to be subject to the new rules for at least eight months without enacted legislation,” the submission stated.
“At a minimum, prior year tax losses as of 1 July 2023 should be excluded from the tax EBITDA calculation as these losses would have been calculated under the existing thin capitalisation asset-based regime.”
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