Australia: Commitment to Pillar Two

Australia has firmly committed to implementing Pillar Two, which will ensure that multinational enterprises with annual global revenue of EUR750 million (approximately AUD $1.2 billion) or more pay a minimum tax rate of 15% on their global income.. In line with the BEPS 2.0 framework, Australia will introduce a domestic minimum tax (DMT) to ensure that large multinationals with Australian residency pay a minimum level of tax in Australia, even if they have low-taxed income from overseas.

Current status

The Australian Government has undertaken extensive public consultation on the implementation of BEPS 2.0, seeking feedback from stakeholders across various industries. The consultation period closed on 24 September 2023, and the Government is currently considering the feedback received. The final legislation for BEPS 2.0 is expected to be finalized in late 2023 or early 2024 and will then need to be passed by Parliament. Alongside legislative developments, the Government is working to establish the administrative arrangements for BEPS 2.0 to ensure a smooth and effective implementation process. The DMT is expected to apply to income years starting on or after 1 January 2024.

Thin capitalisation

The Australian government introduced the Multinational Tax Integrity - Strengthening Australia's interest limitation (thin capitalisation) rules bill 2023 in Parliament on 22 June 2023. The bill passed the House of Representatives on 14 September 2023 and is currently before the Senate.

Expected implementation

The new thin capitalisation rules came into effect for income years starting on or after 1 July 2023.

The new thin capitalisation rules will introduce a number of significant changes, including:

• A new earnings-based approach for determining allowable debt deductions for certain entities, including funds and financial services institutions.
• New debt creation rules that will affect funds and financial services entities.
• A carve-out for Authorized Deposit-Taking Institutions (ADIs) from certain aspects of the thin capitalisation rules.

Debt creation rules

The new debt creation rules prevent entities from circumventing the thin capitalisation rules by artificially creating debt through related-party transactions.

Carve-out for ADIs

The proposed carve-out for ADIs (authorized deposit taking institution) would exempt them from the new earnings-based approach for determining allowable debt deductions. Instead, ADIs would continue to be subject to the existing asset-based approach.

ADIs would also be exempt from the new debt creation rules.

Implications for other financial entities

Other financial entities, such as insurance companies, investment funds, and superannuation funds, will be subject to the full extent of the proposed thin capitalisation amendments.