It is becoming increasingly more complex for investors and superannuation funds to monitor which entities classify as ‘associated entities’ for thin capitalisation purposes and therefore subject to thin capitalisation debt gearing restrictions. This is based upon complex fact patterns and the Australian Taxation Office (ATO) view of who are associates of an investor into a consortium.
Ordinarily, a domestic consortium that is not controlled by foreign entities would be OK and outside of the thin capitalisation restrictions. Is this a correct assumption? It may be that the answer is far more nuanced and needs to be carefully examined. This is important for the superannuation fund, but also can be important for co-investors into consortium transactions.
The thin capitalisation regime operates to fully or partially deny debt deductions within an income year where an entity’s debt-to-equity ratio exceeds a certain threshold. It applies to ‘inward’ and ‘outward’ investing entities, along with defined ‘associated entities’.
Even when members of a consortium are not investing, operating internationally or not controlled by foreign entities, it is important for them to be aware that the thin capitalisation regime can still apply if they are an associated entity of a superannuation fund classed as an ‘outward investing entity’. Such an awareness is necessary to ensure that a company’s debt-to-equity ratio does not exceed a certain limit to ensure debt deductions are not fully or partly denied within an income year.
The consortium vehicle can be considered an ‘associate entity’ (which is very broadly defined) and by association will need to consider the application of the thin capitalisation regime to their debt deductions.
In determining the potential impact of thin capitalisation applying to a consortium with superannuation members, it is necessary to consider the relevant de minimis test, asset threshold and special purpose entity exemptions in order to ensure that an entity can utilise its debt deductions within an income year and avoid having them disallowed. This is not a straightforward exercise and requires a very careful examination.
As with many things associated with tax these days the devil is in the detail – and it is better to determine the devil at the start of an investment rather than in subsequent years.