Restructures and the New Thin Capitalisation and Debt Deduction Rules

The ATO has released a draft guideline (PCG 2024/D3) explaining how it will assess compliance and risk for business restructures under the new thin capitalisation and debt deduction rules.

Starting July 1, 2023, new earnings-based tests for thin capitalisation are in place, and the debt deduction rules will apply to income years beginning July 1, 2024. These rules may disallow interest deductions for some related-party arrangements and affect both multinational companies and private businesses. The PCG builds a risk assessment framework dividing restructures into four zones:

  • White zone: No need for risk assessment – covered by an eligible settlement agreement, with no material changes.
  • Yellow zone: Restructures not in the green, red, or white zones.
  • Green zone: Low risk – applies where restructures are covered by low risk.
  • Red zone: High risk – applies where taxpayers undertake a restructure that is covered by high risk.

Corporate Collective Investment Vehicle Regime 

Law Companion Ruling LCR 2024/1 covers the operation of the corporate collective investment vehicles regime. From a regulatory point of view, a CCIV is a registered company with its liabilities and assets segregated into “sub-funds” and is run by a single corporate director. Each sub-fund is treated as a different trust entity, where general trust taxation rules apply, liable to some changes where it is not eligible for the attribution managed investment trust regime.

The ruling also explains the deeming principle in Subdivision 195-C and its effect on the tax treatment of CCIVs, investors, and CCIV sub-funds. Under the deeming principle, the business, liabilities, and assets of a CCIV sub-fund are considered a separate trust estate, where the beneficiaries are the members of the sub-fund, and the CCIV acts as the trustee. This means that the CCIVs are not taxed as companies, and investors are not taxed as shareholders.

Updated Guidance on School and College Building Funds 

An addendum has been released by the ATO which amends TR 2013/2 to clarify the ordinary meaning of ‘school’ for deductible gift recipient (DGR) endorsement purposes and to ensure that the meaning of school is consistent with the Federal Court decision in The Buddhist Society of Western Australia Inc v Commissioner of Taxation [FCA 1363].

The addendum also includes a new list of factors that can help demonstrate the existence of a school (but are not required):

  • A set curriculum;
  • Instruction or training given by suitably qualified persons;
  • The enrolment of students;
  • Some form of assessment and changes;
  • The creation of a qualification or status recognized outside of the organization.

Updated GST Guidance on Food Marketed as Prepared Meals 

The ATO has released draft determination GSTD 2024/D3, addressing the GST implications for food marketed as prepared meals, following the Federal Court ruling in Simplot Australia Pty Limited v Commissioner of Taxation [2023] FCA 1115. This new draft supersedes the withdrawn GSTD 2024/D1W.

According to Section 38-3(1) of the GST Act 1999, certain food supplies listed in Schedule 1 are not GST-free. For ‘prepared food,’ item 4 specifies that frozen meals marketed as prepared (excluding soup) are included, regardless of whether they are served hot or cold or require preparation.

The Simplot case examined whether products like fried rice and pasta qualify as ‘prepared meals,’ determining that the characteristics of such meals should be understood from common experience. Relevant attributes include:

  • Quantity: The term ‘meal’ indicates a quantity of substance, even if it is a small meal.
  • Composition: A prepared meal indicates food that includes more than one ingredient.
  • Presentation: A prepared meal indicates a combination of foods.

The GST treatment is not based on whether the product is marketed as a prepared meal, but rather, if the product is a member of a class of foods that are marketed as prepared meals.

The draft determination provides guidance on the GST treatment of salad products. If the salad is treated as a prepared meal consisting of different ingredients in a balanced proportion, it qualifies. On the other hand, salad products that do not contain a balanced mix of ingredients are unlikely to be considered food of the kind treated as a prepared meal.