Budget changes are sting in the tail for Australian companies expanding overseas

The government this month announced a number of changes to the corporate tax regime intended to limit the ability of multinational corporations to avoid paying tax in Australia.

But the changes make it more expensive for Australian companies to raise debt to fund overseas expansion, the executive director of tax consulting at Pitcher Partners, Theo Sakell, tells LeadingCompany.

Currently, Australian companies who borrow to finance their purchase of shares in a foreign company are able to avoid paying tax on the interest of such borrowing, provided they own 10% or more of the foreign entity they are investing in.

But in the federal budget changes announced this month, the government claimed multinational corporations were using this rule to structure their investments through Australia, with the sole purpose of avoiding taxes. In response, the government has announced that from July 2014 these provisions will be scrapped, meaning debt accrued in Australia to fund overseas expansion will no longer be eligible for the tax deductions.

“Clearly the government is worried about the actions of multinationals,” Sakell says. “But in the process, they’ve announced changes that affect companies who are dominated by Australian shareholders and managed from Australia. When this hits home in 2014, if I have a client who wants to go overseas, they’re going to find it hard to raise equity capital, especially if they’re not a large, listed company.”

Sakell’s concerns echo those of Computershare CEO Stuart Crosby, who yesterday told the Australian Financial Review that the changes will hurt his company.

“We have grown overseas by borrowing money in Australia to buy assets overseas and the changes attack quite significantly our capacity to get tax deductions for the borrowings we make to do that,” he said.

One possibility for companies keen to still claim tax deductions on any debt used to fund overseas expansion could be for the companies to pass on their loans onto their foreign subsidiaries.

But thin capitalisation rules could limit how much companies are able to do this.

Corporate debt interest payments are generally tax deductable, but most countries do not allow companies who derive a lot of their profits from overseas to claim tax deductibility on debts equal to more than a certain portion of their national assets. This is intended to stop multinational companies loading up their foreign subsidiaries with debt to avoid paying tax.

Australia’s thin capitalisation rules are getting tighter.

In the federal budget, the government announced changes to Australia’s thin capitalisation rules that lowered the tax-deductibility threshold from only being available to companies with debt worth less than 75% of their national assets to those whose debt is worth less than 60% of national assets.

“We were disappointed about that, though not particularly surprised,” Sakell says. “The message coming out of Canberra is that our thin capitalisation rules are overly generous. But if you look at the overall package, these changes will mean we’ll have one of the most robust, rigorous thin cap regimes.”

Sakell would like to see the thin capitalisation rules loosened. “It doesn’t take much time to breach that 60% threshold, especially if you’re expanding,” he said.

However, he welcomes the government raising the threshold at which the rules apply. “From an SME perspective, the government raised the minimum threshold of deductions, under which companies get out of the thin capitalisation rules. That threshold’s gone from $250,000 to $2 million. Which is good, and a bit surprising.”