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Financing costs hit with a non-deductible sledgehammer

Deloitte Federal Budget media release


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14 May 2013: In tonight’s Budget, the Treasurer has introduced a raft of measures restricting interest deductibility by Australian corporates coming into effect for income years that commence on or after 1 July 2014.

The measures are targeted at excessive allocation of debt by multinationals, however they will have an adverse effect on Australian companies investing offshore.

According to Peter Madden, International Tax Partner, Deloitte, “Not only do these measures catch the perceived abuses by foreign multinationals, they also apply to Australian corporates investing offshore. This is a backward step compared to the reforms that have occurred in comparable jurisdictions.”

“At the same time, the proposed Controlled Foreign Companies (CFC) reforms have been put on the back burner. Essentially a double whammy for Australian companies looking to expand overseas.”

“The measures announced tonight include the anticipated reduction of the thin cap safe harbour ratio from 75% to 60%.  The arm’s length debt test has been retained but has been flagged for further review.

Several additional measures which have been announced tonight will also have significant impacts on the deductibility of financing costs by Australian corporates. These include requiring dividends received on non-portfolio share interests in foreign companies which constitute debt under Australia’s debt equity rules to be returned as assessable income rather than being treated as exempt income.

“Tonight’s budget has removed the tax exemption for certain dividends on share holdings, which are deemed to be debt for Australian tax purposes e.g. holding redeemable preference shares in foreign subsidiaries.”

“Interest deductions will also be denied, where the funds are used to derive foreign non-assessable dividends. The cumulative effect of all of these measures will significantly reduce the ability for Australian corporates to obtain an Australian tax deduction for funding costs.”

In summary, Mr Madden said, “Australian companies with debt levels significantly below the thin capitalisation safe harbour level will still be adversely affected should they wish to borrow to finance expansion outside of Australia.  For example, even if an Australian company had no debt and substantial assets in Australia, it would still be denied an interest deduction should it borrow to fund the acquisition of an overseas subsidiary.”  

Deloitte’s Federal Budget 2013 website
Follow Deloitte’s Federal Budget 2013 on Twitter @FederalBudget

NB: See our media releases and research at www.deloitte.com.au

Contacts

Name:
Peter Madden
Company:
Deloitte, Sydney
Job Title:
Partner
Phone:
Tel: +61 2 9322 7449
Email
pmadden@deloitte.com.au
Name:
Vessa Playfair
Company:
Deloitte Australia
Job Title:
Head of Corporate Affairs
Phone:
Tel: +61 2 9322 7576, Mobile: +61 4 1926 7676
Email
vplayfair@deloitte.com.au

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