What the New Thin Capitalisation Rules Mean for Your Small Business

With recent changes to Australia’s thin capitalisation and debt deduction rules, many business owners are asking, "How will this impact me?"

Here’s the good news: if your business pulls in between $1 to $5 million in revenue, these changes probably won’t have much effect on you. The new rules are aimed primarily at large multinational enterprises (MNEs) and are designed to tackle complex international financing structures – not something most small businesses deal with.

Let’s break it down:

1. De Minimis Exemption

There’s a $2 million exemption on total debt deductions (yep, that includes any associated entities). So, if your business is under that, you’re in the clear. Most small to medium businesses fall under this cap, so these changes won’t apply.

2. Targeting Larger Businesses

These rules are focused on curbing the aggressive debt structuring tactics of large multinationals. If you’re not operating across borders or playing in the international finance space, you’re likely out of the target zone.

3. Excluded Entities

Certain entities like authorised deposit-taking institutions (ADIs) and securitisation vehicles are explicitly excluded. While that’s not directly relevant to most small businesses, it shows that these rules are designed for a specific (and narrow) group.

So, What Should You Watch Out For?

Even though these changes might not affect you directly, here are a couple of things you can take advantage of:

1. Prepaid Expenses

If your turnover is less than $50 million, you can still claim deductions for prepaid expenses (for up to 12 months in advance). This is a solid tax planning move to bring forward deductions and reduce your taxable income.

2. Instant Asset Write-Off

If you buy an asset under $20,000 before the end of the 2024 financial year, you can claim an immediate deduction. This is a great way to invest in your business while lowering your tax bill.

3. Ongoing Tax Planning

While these new rules may not apply to you, regular tax planning is essential. Reviewing things like trade debtors, prepaid expenses, and making the most of available deductions can really boost your financial strategy.

Stay Ahead – Talk to Your Tax Advisor

Even though the thin capitalisation rules are aimed at larger enterprises, it’s always a good idea to stay up to date with tax changes. Working closely with your tax advisor ensures you’re compliant and making the most of tax-saving opportunities like the instant asset write-off.

At the end of the day, these new rules won’t have much of an impact on most small businesses, but it’s a reminder that good tax planning is key to staying competitive. If you haven’t had a recent tax review, now’s a good time to get one done!

Feel free to reach out if you want to chat more about how these changes, or any other tax strategies, could affect your business. Let’s keep your business on track and thriving!