Thin Cap ruling by ATO - what does it mean to us??

From: Les .

G'day Dale,

Would you please expand on the following - I just caught sight of it today, and have a few questions/concerns. I hope you can put me right on this....

"Although business will welcome a just released draft ruling on the new thin capitalisation (TC) rules, its announcement less than two weeks before the end of the financial year will leave companies rushing to claim their deductions."
Les>> Is this ruling ONLY for companies? (Later comments seem to say NO)

"Effective for tax periods commencing after 30 June 2001, the TC rules seek to limit the gearing of taxpayers to defined safe-harbour limits."
Les>> Sounds like ALL taxpayers, Dale - please, say it isn't so...

"In essence, if total debt exceeds 75 percent of 'assets' (net of certain liabilities) then tax deductions on interest will be disallowed."
Les>> Assuming this might apply, Dale, how do you interpret the last paragraph? Does it mean that Interest ABOVE 75% LVR is no longer Tax Deductible? Or, does it mean if LVR exceeds 75%, then NONE of the Interest is Tax Deductible?

Looking forward to your reply - or anyone else who are aware of this "Thin Cap ruling"



- "Eschew Obfuscation" - ;^)
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Reply: 1
From: Duncan M

Hi Les,

I cant provide a definitive answer but the object of the thin capitalisation rules is to prevent the use of excessive inhouse loans which would otherwise enable the profits of the Australian entity to be shifted to non-Australian owners in the form of tax deductible interest payments.

I dont believe it relates to wholy Australian owned and controlled entities.

Maybe Dale can further clarify.



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Reply: 1.1
From: Tibor Bode


Excellent point. While on the surface Duncan's explanation seems reasonable (I am also under the same impression) the devil is in the details. This would be the de facto end of negative gearing if it would be true!
I am also looking forward Dale's view on it.

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Reply: 1.2
From: Dale Gatherum-Goss

Hi Les! Hi Duncan!

Forget it, it does not apply to 99% of Ozstralians.

The TC rules apply, as Duncan suggested, to internal structures and primarily with investments overseas.

It should not apply to most people on this forum (possibly even all) and as such I have only a passing knowledge of the subject.

Relax and thanks for the questions.

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