Thin Capitalisation & Debt/Equity

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From: Sergey Golovin


Did you people hear about -

New Business Tax System (Thin Capitalisation) Bill 2001 ("the Thin Capitalisation Bill") and the New Business Tax System (Debt and Equity) Bill 2001 ("the Debt/Equity Bill") and amendments to those bills at 26 September 2001 (KPMG)?

Where they are talking about minimising amount of deductions on interest on the amount borrowed?

Duncan?

Serge.
 
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Reply: 1.1
From: Sergey Golovin


Thanks Tom.

I was not sure what exactly they are talking about in the paper.
People at work did try to read it few times and give up.
I did read it 2-3 times and still need more reading done.

Very well written document, excellent writing language skills.
I wish I could do something similar (probably will never happen) write in same style, very sleepy though. I did fall a sleep reading on the train coming back from work, nearly missed my station.
I was bit panicky and not sure if it is from nearly missing the station or from the document.
So, I jumped on the forum straight away.

They also talking about -
1. Overseas interest in Australia as well as Australian interest overseas.
2. Amount of deductions will be minimised if interest repayments on the loan is in access of $250,000 year...
3. Then they have mentioned something about residential (?). So, I guess they are talking about large-scale projects?

Thanks in advance.

Serge.
 
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Reply: 1.1.1
From: Tom Cleary


Serge
Thin capitalisation rules deal with the allocation of income between countries.What the new act is attempting to do is widen the present scope where the rules only apply to foreign RELATED debt and debt covered by a formal guarantee by making it apply to total debt of the Aust operations of an multinational
investor.They want a safe harbour gearing ratio of 3:1 to apply which is the level for authorised banks and other institutions subject to capital adequacy rules.Financial institutions not subject to c.a.r.would be brought within this ratio but with an "on-lending" rule disregarding debt to the extent that it is on-lent of 20:1 beyond which interest deductions would be disallowed. The rules will also apply to Australian investors with foreign subsidiaries, also the control test will be raised from 15% to 50%.
These appear to be the main gist of the act,
obviously there was some creative accounting going on, which they want stopped. However there are many ways to skin a cat and new ways will be found to avoid tax, self insurance using an orphan offshore trust, comes to mind, which could be a winner especially in the present environment.
Regards
Tom
 
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Reply: 1.1.2
From: Tom Cleary


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Serge
Have not had a chance to have a good look at how the Act is different =from present rules
The concept of thin capitalisation was imported from England a few years =ago to counter transfer pricing by multinational organisations which =were charging high interest rates to its subsidiary to minimise the =profits in Australia and therefore tax payable. Often these coeporations =were headquartered in low or no tax countries eg Bahamas, Ireland etc.
What the present act seems to want to capture is the situation where =there is genuine borrowings from a third party by HQ and the cost of =these borrowings are then allocated on a divisional basis, which is =normally kosher and legal but they want to confine the scope within =limits which the ATO is laying down, otherwise the full amount of =interest allocated will not be claimable in Australia, therefore =increasin reported profit and tax payable by the local entity.
I.E. it is the widening of the scope of the act to third party =borrowings and their cost accounting allocation to divisions in =Australia.
However as I said I have not researched the situation enough at present =but that is how it reads to me.
Regards
Tom

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Serge
Have not had a chance to have a good =look at how
the Act is different from present rules
The concept of thin capitalisation was =imported
from England a few years ago to counter transfer pricing by =multinational
organisationswhich were charging high interest rates to its
subsidiaryto minimise the profits in Australia and therefore tax =payable.
Often these coeporations were headquartered in low or no tax =countrieseg
Bahamas, Ireland etc.
What the present act seems to want to =capture is
the situation where there is genuine borrowings from a third party by HQ =and the
cost of these borrowings are then allocated on a divisional basis, which =is
normally kosher and legal but they want to confine the scope within =limits which
the ATO is laying down, otherwise the full amount of interest allocated =will not
be claimable in Australia, therefore increasin reported profit and tax =payable
by the local entity.
I.E. it is the widening of the scope of =the act to
third party borrowings and their cost accounting allocation to divisions =in
Australia.
However as I said I have not researched =the
situation enough at present but that is how it reads to me.
Regards
Tom

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Reply: 1.1.1.1
From: Sergey Golovin


Thanks Tom,
Thanks for the answer.

I do like that expression "creative accounting" some how I can relate to it. Do not know how to do it, but like the expression.

Oh well, I guess now we can sleep well for while.

Serge.
 
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