The legislation to implement the proposed thin capitalisation changes has been introduced into Parliament. The proposed changes are still proposed to apply from 1 July 2014. Thin capitalisation rules seek to deny interest deductions to foreign controlled entities, or Australian entities which have offshore activities. There is good news for small to medium enterprises as thin capitalisation rules will no longer  apply to entities whose total debt deductions (e.g. interest) are less than AU$2 million p.a. There is also a new “worldwide gearing” test for foreign controlled entities which might be able to be used as an alternate to the “safe harbour” rules. However, the bad news is that the maximum allowable debt under the safe harbour thresholds is proposed to be reduced to 60% of the group’s Australian assets (formerly 75%).

The thin capitalisation calculations required are complex, and many companies may need to restructure their debt and equity arrangements in order to comply with the new ratios.