NO.002
THIN CAPITALISATION — INTERNATIONAL FINANCIAL REPORTING STANDARDS
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.
MELBOURNE
24 January 2005
Contact: Amanda Kennedy
03 9650 0244