On 28 August 2019 the Australian Taxation Office (ATO) released draft Practical Compliance Guideline PCG 2019/D3 (the Draft PCG), which sets out the ATO's views on practical aspects of the Arm’s Length Debt Test (ALDT) which is relevant for thin capitalisation purposes. The release of the Draft PCG follows release of draft Taxation Ruling TR 2019/D2 (the Draft Ruling) which provided the Commissioner of Taxation’s views on key technical aspects of the ALDT. It is intended that once finalised, the Draft Ruling accompanied by the Draft PCG will replace the only other earlier guidance on the ALDT issued by the ATO in 2003 (TR 2003/1).
The picture that emerges from the Draft Ruling and Draft PCG is that, in the Commissioner’s view, while Australia’s thin capitalisation legislation itself has not changed, the evidence and analysis required to discharge the onus of proof for the taxpayer that it has satisfied the key legislative requirements of the ALDT has significantly increased.
