Following the adoption of International Financial Reporting Standards (IFRS) on 1 January 2005, the Government will provide a three-year transitional period for the purposes of the thin capitalisation regime. During the transitional period, taxpayers will be able to undertake their safe harbour calculation using Australian General Accepted Accounting Principles as they existed pre 1 January 2005.
The transitional period will provide sufficient time for the Government to examine whether the existing thin capitalisation rules are appropriate following the adoption of IFRS.
Background
The thin capitalisation regime seeks to ensure that multinationals do not allocate an excessive amount of debt to their Australian operations, thereby claiming excessive income tax deductions. Most taxpayers assess their thin capitalisation position on the basis of the safe harbour debt test. This rule allows taxpayers a debt-to-asset ratio of up to 75 per cent. Where a taxpayer exceeds this ratio, a portion of their interest expense deductions is denied unless they can satisfy the worldwide gearing test or the arm’s length test.