Statement on the Federal Opposition’s proposed changes to tax arrangements
The changes to tax arrangements proposed by the Federal Opposition are likely to have a negative impact on investment in Australia.
Australia already has strong tax integrity rules and any changes to existing tax arrangements must be carefully considered and not detract from Australia’s ability to attract investment capital.
The thin capitalisation changes proposed will impact investment in Australia by limiting legitimate tax deductions for interest expenses. This will particularly harm the ability of capital intensive industries such as mining to debt fund investments in Australia.
The proposed changes are not targeted to ‘tax avoidance’ arrangements. They will impact on all business debt funding investments into Australia and potentially Australian based multinationals expanding offshore including legitimate deductions.
Australia’s tough thin capitalisation rules were strengthened from 1 July 2014 and any further changes would add to perceptions of sovereign risk of investing in Australia. Australia’s ‘safe harbour’ test was reduced from 75 per cent of debt to equity to 60 per cent and includes a broader range of debt compared with many other countries. It includes ‘total debt’ versus more narrowly defined ‘related party’ debt.
Australia’s existing thin capitalisation and broader tax integrity regime is amongst the strongest globally. ATO Second Commissioner Andrew Mills emphasised the integrity of Australia’s tax laws in a speech in October 2014: ‘With changes over recent years, we have transfer pricing and anti-avoidance laws that are – if not the strongest - among the strongest in the world and we are not afraid to use them.’
The existing OECD Base Erosion and Profit Shifting (BEPS) process is the most effective and appropriate way to deal with global tax avoidance. Australia should continue to work co-operatively in a co-ordinated way through the OECD BEPS process.