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Legislation

Tax Telegraph, October 2013

CasesThin capitalisation – arm’s length test review

As part of a package of measures aimed at protecting the integrity of Australia’s corporate tax system, the former Labor Government commissioned the Board of Taxation (Board) to undertake a review of the thin capitalisation arm’s length debt test. From a policy perspective, the arm’s length test is intended to provide a carve-out from the thin capitalisation rules for a level of debt which is considered to be ‘commercial or independent’. The arm’s length test focuses on what a business that is acting at arm’s length would borrow and what independent commercial lenders would lend to that business. However, the former government was of the view that the arm's length test imposes high compliance costs on taxpayers and can be difficult for the ATO to administer.

The Board was asked to make recommendations for modifying the arm’s length debt test so that it is better targeted to reduce the scope for profit shifting and protect sectors with naturally higher gearing while reducing its compliance burden.

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