Trans-Tasman Thin Capitalisation Rules and Treaties: Implications for New Zealand and Australia on Tighter Thin Capitalisation Ratios

Australian Tax Forum, 2013, Vol. 28, No. 3, 605-640

36 Pages Posted: 8 Oct 2013

See all articles by Craig Elliffe

Craig Elliffe

University of Auckland - Faculty of Law

Date Written: December 27, 2012

Abstract

This article begins by examining the relationship between thin capitalisation rules and double tax treaties. After examining the potential for a fundamental conflict in this area it looks at the OECD’s attempts to resolve the problem (in section 2). In sections 3 and 4, the article examines the key questions relating to the New Zealand thin capitalisation rules and whether the non-discrimination provisions of Article 24 (5) should apply to fixed ratio safe harbour thresholds. Section 5 applies the conclusions to New Zealand’s tax treaty network suggesting that the thin capitalisation regime may be ineffective in certain circumstances with three major trading partners. The specific versus general anti-avoidance rules are considered in section 6. The implications of the New Zealand analysis are considered in the context of the Business Tax Working Group’s recommendations for potential reform to the Australian thin capitalisation rules (section 7). In the 2013 Commonwealth Budget it was announced that the thin capitalisation “safe harbour” debt limit has been reduced to 60 per cent of adjusted Australian assets for income years continuing on or after 1 July 2014. The Australian threshold now aligns with the changes New Zealand made to the thin capitalisation rules for the 2011/2012 income tax years. The conclusion reached in this article is that the design of thin capitalisation rules necessarily requires consideration of treaty obligations and that both countries should watch carefully developments in this area.

Keywords: thin capitalisation rules, non-discrimination, article 24, double tax treaties, fixed ratio safe harbour thresholds

JEL Classification: K34

Suggested Citation

Elliffe, Craig Macfarlane, Trans-Tasman Thin Capitalisation Rules and Treaties: Implications for New Zealand and Australia on Tighter Thin Capitalisation Ratios (December 27, 2012). Australian Tax Forum, 2013, Vol. 28, No. 3, 605-640, Available at SSRN: https://ssrn.com/abstract=2337191

Craig Macfarlane Elliffe (Contact Author)

University of Auckland - Faculty of Law ( email )

Private Bag 92019
Auckland Mail Centre
Auckland, 1142
New Zealand

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