Australia's New Multinational Tax Law Could Spell Disaster For Local Businesses

by Mary Swire, Tax-news.com, Hong Kong

06 April 2001

Tax experts in Australia say a new tax designed to close a loophole which has been used by multinational companies to avoid paying tax could also affect the country's local businesses and residents.

A common practice among the multinationals has been to use their debts to fund their businesses but the new tax will force them to rely on equity to finance their operations in Australia so they can no longer claim tax breaks. However, consultants say that it will also prevent local businesses and individuals who use the practice of combining debt and equity to bankroll their operations from claiming their tax breaks. In a submission document arguing against the new tax Mr Ken Traill, the Institute of Chartered Accountants' (ICA) principal consultant on tax reform, said: 'Changing the rules during the investment period is tantamount to entrapment.'

Michael Dirkis, a consultant for the Tax Institute, says that the new tax regulations are similar to previous government plans which aimed to crack down on trusts but they were abandoned because they were considered 'heavy-handed' and just as inequitable. Mr Dirkis argues: 'The very reasons why the Government stepped round non-commercial loans and the profits-first rules [and ultimately dumped their plans to crack down on trusts] was their total inequity, and here they are appearing in another guise.'

Provisions within the new tax's regulations insist that it only targets multinationals but tax experts have said that the law would impact across a range of existing tax laws. Mr Trail said: 'We are very concerned that the application of the debt/equity provisions, as drafted, may be far more pervasive than the Government ever intended. We are very concerned that the potential implications of such application have not been fully considered or developed.'

The new tax is scheduled to take effect from 1 July this year but Treasurer Peter Costello, who has already put some of his business tax reforms on hold, is facing calls from accountancy and business lobby groups such as the ICA to defer the tax until next year. But with an expected revenue of around AU$411 within the next 12 months their appeal is likely to fall on deaf ears.

Recommended