Foreign Investors Will Benefit From Revised ATO Ruling

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

28 July 2006

Foreign investors stand to gain the most from the Australian Taxation Office’s (ATO) revised stance on interest deductibility, according to accounting firm PricewaterhouseCoopers.

Under the new rulings, issued on July 26, there will be more situations in which businesses can claim a tax deduction for interest costs. These new circumstances include debt arising from internal group reorganisations and refinancing transactions.

The new ruling replaces drafts released in August last year which sought to limit interest deductions under the corporate tax consolidation rules.

"As a general principle, all funding costs of a business should be tax deductible provided thin capitalisation requirements are satisfied. The August 2005 draft rulings challenged this principle,” noted PwC International Tax Partner Peter Collins.

"All foreign owned and operated businesses will welcome this change. Many of them would have been planning to comply with the conditions of the draft ruling as it unusual for a draft ruling to be revised," he added.

Collins suggested that interest associated with the reorganisation of the Australian subsidiaries of a foreign company would be non-deductible under the August 2005 rulings. For example, deduction of interest would have been denied in a simple reorganisation reducing the number of Australian holding companies and increasing the debt/equity ratio of the Australian group.

In the revised ruling, the ATO has accepted the refinancing principle, meaning that interest on loans will be fully tax deductible provided the head company of the consolidated tax group can show that all of the interest expense is related to business activity.

"The reconsidered position is a relief for foreign investors," continued Collins. "The views the ATO expressed in last year’s drafts were difficult to follow and had raised many concerns.”

However, he added that it was "unfortunate" that the revised rulings still include uncertainty in relation to refinancing of unrealised profits.

"In some cases, the effect of this interpretation may see foreign investors worse-off under the tax consolidation rules," he observed.

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