Assets can be revalued for thin capitalisation purposes, provided the revaluation is done in accordance with accounting standards, even if they are not also revalued for accounting purposes.
Once an asset is revalued, the asset must continue to be revalued in accordance with the frequency set out in the accounting standards. If the entity does not continue to revalue in accordance with the accounting standards, then it cannot use the original revaluation for the period that it fails to comply with the accounting standards in this regard. It must use the value specified in its financial statements.
If the revaluation is done for the purposes of calculating the entity's thin capitalisation position and is reflected in its financial statements that it is required by Australian law to prepare, the revaluation does not need to be done by either an external expert or an internal expert. However, if either the entity is not required to prepare financial statements or it is required to but the revaluation is not reflected in those statements, the revaluation must be done by either an external expert or by an internal expert.
An independent expert is a person:
- who is an expert in relation to valuations of that class of assets, and
- whose pecuniary or other interests could not reasonably be regarded as being capable of affecting that person's ability to give an unbiased opinion in relation to that valuation.
An internal expert must be a person who is an expert in valuing such assets, and
- whose pecuniary or other interests could reasonably be regarded as affecting the person's ability to give an unbiased opinion but only because the person would be one of the following
- performing duties as an employee of the entity
- providing services to the entity under an arrangement with the entity that is substantially similar to a contract of employment.
To be an acceptable value, the internal expert must make the revaluation in accordance with a methodology that has been reviewed and accepted as suitable by an external expert – see criteria above. The review of the methodology by the external expert must include the validity of any assumptions made, and the accuracy and reliability of the data and other information to be used.
Revaluing an asset in a class of assets
The values used for thin capitalisation purposes are the values calculated under the accounting standards. If the accounting standards require an asset to be revalued at certain intervals, the entity must comply with this for thin capitalisation purposes as well.
A strict adherence to this would require that once an asset in a class is revalued, all the assets in that class must be revalued. The thin capitalisation rules will allow an entity to revalue one or more assets in the class only, provided that no asset in the class of assets has fallen in value.
Example 8: Revaluing assets
Two assets in the same class – asset A and B – have a carrying value of $1,000 and $2,000 respectively. The entity wants to revalue asset A but not asset B. In the relevant income year, asset A has increased in value to $1,200 and the value of asset B has remained the same. Because, as a class, no asset has fallen in value, asset A can be revalued without having to also revalue asset B. However, if the value of asset B had fallen to $800, asset A could not be revalued without asset B also being revalued.
End of example
An entity must keep records in relation to the revaluation containing details about all of the following:
- the methodology used in making the revaluation, including any assumptions that may have been made
- how the methodology was applied, including information used
- who made the revaluation, their qualifications and their experience as an expert in valuing assets of the relevant kind
- the remuneration and expenses paid to that person.
Where the revaluation was made by the internal expert, the records must also include the following details:
- who the external expert was that reviewed the methodology for the valuation
- the external expert's qualifications and experience as an expert in valuing assets of the relevant kind
- the remuneration and expenses paid to the external expert
- the external expert's review of the methodology and their agreement that the methodology is suitable.
All records must be prepared by the time the entity must lodge its tax return for the income year for which the revaluation is made.
However records need not be kept where the asset was revalued subject to subsection 820-680(2A) of the ITAA 1997.
Assets can be revalued for thin capitalisation purposes, provided the revaluation is done in accordance with accounting standards, even if they are not also revalued for accounting purposes