According to Mike Seccombe in the Saturday Paper of June 7-13, the Abbott government has a rather expansive view of what constitutes a “small” business. As a result, they have announced their intention to revise section 25-90 of the tax act, the “thin capitalisation” rules.
The previous Labor government had announced steps to limit the process by which companies could structure their operations to load up a subsidiary with debt borrowed from a related company off-shore, and then claim the interest as a tax deduction. Under this scenario, once the debt to equity ratio passed 1.5 to 1, and total interest repayments exceeded $250,000, the tax man would start asking questions.
Not any more. The Abbott government will increase the threshold for interest repayments eightfold, from $250,000 to $2 million, in order to “spare small business compliance costs”. Somehow, a small business borrowing enough to incur interest repayment costs of $2 million each year, and then writing it off as a tax deduction, doesn’t quite sound like a small business to me…..