12 September 2007

Thin Capitalisation: Application of Accounting Standards

The Minister for Revenue and Assistant Treasurer, Peter Dutton, today announced that the Government will make changes to the thin capitalisation rules in the income tax legislation to address some of the adverse impacts of the adoption of Australian equivalents to International Financial Reporting Standards (AIFRS).

Under the thin capitalisation rules, entities are required to use accounting standards to value assets, liabilities and equity capital.  Differences between AIFRS and the previous accounting standards (known as Australian Generally Accepted Accounting Principles or AGAAP) resulted in the thin capitalisation positions of some entities being substantially affected.

In recognition of this, the Government put in place a transitional period during which entities may elect to use either AIFRS or AGAAP to make thin capitalisation calculations.

‘Although the transitional period does not begin expiring until 31 December 2008, the Government acknowledges that, to facilitate business planning and decision making, it is important for entities to have adequate notice of legislative changes,’ Mr Dutton said.

‘The proposed amendments will address several critical issues relating to the adoption of AIFRS, and follow extensive consultation with taxpayers and their advisers.  The Government acknowledges there are other issues of concern surrounding the application of AIFRS to thin capitalisation calculations, and these will be given further consideration.  Any future changes to the rules will be subject to consultation before announcement,’ Mr Dutton said.

The Attachment provides more detail about the changes.  Draft amendments will be prepared as soon as practicable for consultation.


Attachment

The following amendments to the thin capitalisation rules are proposed:

Standard on intangible assets

  • Entities will be able to elect to depart from the AIFRS standard on intangible assets (AASB 138).  In particular, entities will be permitted to recognise and value intangible assets for which the ‘active market’ requirement under AASB 138 cannot be met. 
    • The election would be required to be made for each income year but, once made, would not be revocable during that income year.
    • Entities with existing intangible assets falling into this category would be permitted, for thin capitalisation purposes, to use the same values for the assets that were calculated under the pre-AIFRS (or AGAAP) standards.
    • The assets would be subject to impairment testing, as provided for under AASB 136.
    • The process of valuing (or revaluing) the assets would be consistent with the current requirements in section 820-680 (that is, the assets could be (re)valued by an external expert, or be (re)valued by an internal expert provided the methodology had been approved by an external expert).

Standards on income taxes and employee benefits

  • The AIFRS standard on income taxes (AASB 112) will not apply for the purposes of thin capitalisation to the extent that it requires recognition of deferred tax assets and deferred tax liabilities.
  • The AIFRS standard on employee benefits (AASB 119) will not apply for the purposes of thin capitalisation to the extent that it requires recognition of surpluses and deficits in defined benefit superannuation funds.
    • The application of these aspects of AASB 112 and AASB 119 has the potential to introduce substantial volatility into the balance sheet asset and liability values of many entities.