Tax base erosion through thin capitalisation: Consequences of Australian reforms and the tax accounting interface

Base erosion and profit shifting (popularly known as BEPS) is a pervasive issue reducing the tax collections of nations on a global scale. In response, the OECD has called for action by all governments to stem tax base erosion, with one idea being to curtail the use of debt financing as a means of obtaining excessive interest deductions. Australia, along with other nations, is responding in kind by tightening its thin capitalisation provisions, which deny the taxpayer a deduction for any finance expenses on excess debt. In determining whether a taxpayer has excess debt levels, calculations are based on asset, liability and equity capital values determined in accordance with accounting standards. The aim of this article is to highlight the techniques available to taxpayers, both within accounting standards and the thin capitalisation provisions, to cushion the impact of more stringent legislation.