This proposal has six components.

Component 1: Change the thin capitalisation rules by removing the ‘safe harbour’ and ‘arm’s length’ debt tests, leaving only the ‘worldwide gearing’ debt test.

Component 2: Reintroduce the 2012‐13 Budget measure Bad debts – ensuring consistent treatment in related party financing arrangements. The component would deny tax deductions for bad debts written‐off by creditors where the debtor is a related party. The corresponding gain to the debtor would not be subject to tax.

Component 3: Denial of a tax deduction for royalties sent to foreign recipients when the royalties are paid by a significant global entity for the use of, or right to use, intellectual property within Australia, and either:

• the royalties are paid to a related‐party in a jurisdiction that is subject to the ‘sufficient foreign tax test’ as outlined in section 177L of the Income Tax Assessment Act 1936
• the jurisdiction houses intellectual property in a tax preferential patent box regime.

The tax deduction would only be allowed if the firm can substantiate to the Commissioner of Taxation that the royalties are not related to intangible assets housed in a non‐double‐tax‐agreement jurisdiction, or housed in a tax‐preferred patent box.

Component 4: Apply a minimum final withholding tax of 30 per cent on fixed trust cash distributions to non‐residents.  Non‐residents would not be able to claim a refund of this withholding in Australia since it is a final withholding tax.  Distributions to non‐residents paid out of managed investment trusts or collective investment vehicles would not be subject to the withholding tax.  Withholdings on distributions to Australian residents remain unchanged.

Component 5: Deny deductions for meal and incidental employee allowances from the substantiation exemption, when such deductions are associated with travel to certain jurisdictions. Individuals may apply to the Commissioner of Taxation to allow the deduction.  To do so they would need to provide complete substantiation of all costs, and justification that such costs were incurred in the production of assessable income.  The portion of allowance associated with travel to affected jurisdictions that cannot be substantiated and justified as incurred in the production of assessable income would attract a fringe benefits tax (FBT) liability.

Component 6: Deny deductions from companies for expenditure on:

• flights and other travel to or from certain jurisdictions
• professional services provided in, or by a firm located in, certain jurisdictions. 

Individuals may apply to the Commissioner of Taxation to allow the deduction. To do so they would need to provide complete substantiation of all costs and justification that such costs were incurred in the production of assessable income.  The expenditure that cannot be substantiated and justified as incurred in the production of assessable income would attract an FBT liability.

For Components 5 and 6 the specified jurisdictions are Andorra, Liechtenstein, Guernsey, Monaco, Mauritius, Liberia, Seychelles, Brunei, Maldives, Cook Islands, Nauru, Niue, Marshall Islands, Vanuatu, Anguilla, Antigua and Barbuda, Bahamas, Barbados, Belize, Bermuda, British Virgin Islands, Cayman Islands, Grenada, Montserrat, Panama, St Vincent and the Grenadines, St Kitts and Nevis, Turks and Caicos, and the US Virgin Islands.

Component 4 of the proposal would have effect from 1 July 2020.  All other components of the proposal would have effect from 1 July 2019.