AUSTRALIA Law and Practice Contributed by: John Schembri and Erin Cartledge, Gilbert + Tobin
additional conditions are satisfied, including that: • there are two or more lenders where each lender severally, but not jointly, agrees to lend money (or to otherwise provide financial accommodation); and • the agreement describes itself as “syndicated loan facility” or “syndicated facility agree- ment” , and the borrower(s) will have access to at least AUD100 million (or its equivalent) at the time of the first drawdown (even if that amount is not actually drawn at such time). Australia has DTAs in place with Finland, France, Germany, Iceland, Japan, New Zealand, Nor- way, South Africa, Switzerland, the UK and the USA, under which no IWT is payable for interest derived by a qualifying financial institution unre- lated to, and dealing wholly independently with, the borrower (subject to certain exceptions). DTAs with Chile, Israel and Portugal reduce the IWT to 5% for similar financial institutions. The definition of a financial institution generally cov- ers banks, but can include an enterprise that substantially derives its profits by raising debt finance in the financial markets or by taking deposits at interest and using those funds in carrying on a business of providing finance, and excludes debt funds that do not accept depos- its. 8.3 Thin-Capitalisation Rules Australia’s thin capitalisation regime aims to limit tax deductions for interest expenses on debt, particularly for foreign entities investing into Australia, Australian entities that are foreign controlled, and Australian entities investing over- seas. There are some exceptions including a de minimis exception where a taxpayer’s Australian
debt deductions do not exceed AUD2 million per income year (on an associate inclusive basis). Up to 30 June 2023, the thin capitalisation rules denied tax deductions for interest to the extent that the amount of debt used to fund the tax - payer’s Australian operations exceeded “safe harbour amount” (broadly being 60% of the difference between the value of the taxpayer’s Australian assets and its non-debt liabilities). There was also an arm’s length debt test, which permitted Australian groups to be debt-funded up to the amount a third-party lender would be willing to lend (based on certain assumptions), and a worldwide gearing test, which allowed an eligible entity to gear its operations in certain circumstances by reference to the level of gear- ing in its worldwide group. With effect from 1 July 2023, the tests referred to above have been replaced with the fixed ratio test, the third party debt test, and the group ratio test. The new default test is the “fixed ratio test” which, in broad terms, limits net debt deduc- tions for an income year to 30% of a taxpayer’s “tax EBITDA” . Tax EBITDA is calculated by tak- ing the taxpayer’s taxable income or loss for the income year (disregarding the operation of the thin capitalisation rules) and adding back net debt deductions, certain deductions for tax depreciation and capital works. Any net debt deductions that exceed this limit can be carried forward for up to 15 years and utilised in a sub- sequent income year in which there is excess capacity, subject to the satisfaction of recoup- ment tests. Where certain conditions are satisfied, a choice can be made by a taxpayer to apply the third- party debt test. The third-party debt test denies
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