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The changes to the R&D tax concession in 2011 were touted as the biggest reform to business innovation policy in over a decade. Three years later, as part of the 2014 Federal Budget, a reduction in the concession rates was announced. While the most recent of the proposed changes are designed to align with the reduction in company tax rate, the Australian Federal Government also indicated that the gain to revenue from the reduction in the incentive scheme will be redirected by the Government to repair the Budget and fund policy priorities. The consequence is that the R&D concessions, while designed to encourage innovation, are clearly linked with the tax system.

Constitutional specialists and political economy scholars commonly believe (wrongly) that federalism is a matter of constitutional divisions of powers and responsibilities and the political and legal processes of reconciling overlaps and lacunae arising from those divisions. Political realists know it’s all about the money – specifically which level of government gets to tax what. The constitution may give lower tier governments responsibilities for constructing highways, establishing universities, building hospitals, regulating superannuation systems and funding schools and disability programs. The true power, however, lies with the government that has the cash.

A nation’s thin capitalisation laws are an important instrument for preventing revenue loss resulting from excessive allocation of debt to resident operations. These laws can also act as a tool for regulating the structures and processes of entities within a nation’s borders. The principal purpose of this paper is to establish the merits of Australia’s thin capitalisation laws based on three criteria: the extent to which they comply with OECD guidelines; the extent to which they reflect the policy behind their enactment; and their strength relative to the thin capitalisation regimes of fellow OECD member countries. The paper will also provide comment on the recent proposals to reform the thin capitalisation regime following the 2013-14 Federal budget release.