Australia: Arm’s length consideration and related-party loan

Australia: Arm’s length consideration

A clear illustration of the focus on base erosion and profit shifting (BEPS) is an appeal filed by a major oil company against a tax assessment, pending before Australia’s Federal Court.

Related content

At issue is whether an interest rate of 9% on an advance of U.S. $2.5 billion to an Australian taxpayer from its U.S. subsidiary exceeded what would be arm’s length consideration.

The Australian Tax Commissioner has challenged the commerciality of the loan, contending that the interest rate applied was higher than ordinary terms and that it would be unsustainable for a borrower to uphold a loan at that rate and unreasonable for a lender to provide a loan when the terms offer no actual security or covenants.

Possible thin cap implications

If the Commissioner’s arguments are successful, arm’s length consideration under the transfer pricing rules could become more difficult for taxpayers to satisfy. There would be uncertainties for taxpayers as a result of the tightening of these rules—particularly when precedent is created for essentially allowing related-party transactions to be priced based on hypothetical scenarios.

Also, there may be effects on other tax law provisions. For example, the reduction to the safe harbour debt amount under the thin capitalisation rules means that greater reliance would be placed on the “arm’s length debt test.”

Although the concept and application of the “arm’s length debt test” for thin capitalisation purposes is distinct from the transfer pricing rules, it has historically been recommended that these rules be more closely aligned. If the court were to accept the Commissioner’s position, so that there would be a tightening of the arm’s length transfer pricing rules, this would signify a departure from this recommendation—particularly in light of the work currently being undertaken to ease taxpayers’ compliance costs in applying the thin capitalisation “arm’s length debt test.”


Read a January 2015 report prepared by the KPMG member firm in Australia: Implications of Chevron extend beyond transfer pricing

The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.

Connect with us


Request for proposal



KPMG's new digital platform

KPMG's new digital platform