The Australian Taxation Office (ATO) has announced that new thin capitalisation and debt deduction rules will be a primary focus for compliance reviews among top 100 and top 1,000 taxpayers. These changes are part of the ATO’s justified trust program, which aims to ensure large businesses meet their tax obligations accurately.
Increased Scrutiny on Thin Capitalisation Rules
The ATO has highlighted that the application of the revised thin capitalisation rules could significantly impact affected businesses. As part of its compliance and assurance programs, the ATO will review financial years where these rules are applicable to ensure proper adherence.
Entities subject to justified trust reviews will be required to provide tailored information specific to their financial structure and reporting obligations. The ATO’s goal is to build confidence that Australia’s largest taxpayers are complying with these new regulations.
Documentation and Compliance Requirements
To meet compliance expectations, businesses undergoing justified trust reviews must prepare and submit various forms of documentation. The ATO may request :
- Calculations and working papers supporting reported thin capitalisation and debt deduction amounts.
- A signed and dated approved form for entities applying the third-party debt test or the group ratio test.
- Evidence of financial arrangements and their compliance with Division 820 of the Income Tax Assessment Act 1997.
- Clarifications on financial reporting that align with previous submissions to ensure consistency.
These requirements highlight the ATO’s focus on ensuring transparency in corporate tax compliance, particularly among multinational enterprises and large businesses operating in Australia.
The Role of the Tax Avoidance Taskforce
The Tax Avoidance Taskforce will oversee enforcement efforts, ensuring that multinational corporations, large public and private businesses, and high-net-worth individuals meet their tax obligations.
The taskforce plays a central role in :
- Monitoring tax practices of major entities.
- Identifying potential non-compliance related to thin capitalisation rules.
- Ensuring large businesses do not reduce tax liabilities through excessive debt deductions.
By strengthening its ability to assess thin capitalisation arrangements, the ATO aims to close potential gaps that could lead to tax avoidance.
Strengthening Compliance Efforts
This renewed focus on thin capitalisation aligns with broader efforts by the Australian government to combat tax avoidance and maintain a fair tax system. Businesses included in the top 100 and top 1,000 taxpayer groups will need to ensure they have robust documentation and compliance frameworks in place to meet the ATO’s evolving expectations.
The justified trust program will continue to serve as a key mechanism in validating corporate tax compliance, providing assurance to both the government and the public that large businesses are contributing their fair share.
