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APPENDIX – DETAILED COMMENTS Allocation of associate entity excess capacity to complement removal of distributions 46.
It is critical that a rule be included to allow the for the allocation of excess interest capacity if taxable distributions are to be excluded from an entity’s tax EBITDA under proposed subsections 820-52(2), (3), (6), (8) and (9).
47.
We understand these rules were included to prevent ‘double counting’ of tax EBITDA (i.e. taxable income at the subsidiary level as well as distributions sourced from that same taxable income at the investor level). We note that double gearing structures were identified as an integrity risk to the balance sheet safe harbour rules. 4
48.
Under the existing safe harbour rules, the prevention of double gearing by grouping associate entities is achieved by a combination of two complementary rules in the safe harbour calculations: 48.1.
The exclusion of associate entity equity from an entity’s average assets; and
48.2.
A mechanism by which the amount of assets held in excess of the safe harbour debt amount can increase the safe harbour amount for certain associate entities.
49.
These rules prevent excessive debt being introduced into structures while ensuring that it does not unfairly punish group structures where the debt is incurred at the parent or investor level.
50.
By way of example, a group that invests $40m of equity and borrows $60m of debt to fund a $100m investment should generally not breach the safe harbour rules, regardless of how that debt is allocated between a parent entity and subsidiary. This is demonstrated by the following examples:
4
Refer to paragraph 2.5 of the revised EM to the Treasury Laws Amendment (Making Sure Foreign Investors Pay Their Fair Share of Tax in Australia and Other Measures) Bill 2019.