Calculating average values
Entities must calculate the average values of items such as their assets, non-debt liabilities, debt capital and equity capital in order to apply the thin capitalisation rules. The rules provide three methods for working out average values:
- the opening and closing balances method – an average of the opening and closing values for the period
- the three measurement days method – an average based on three specified days during the period
- the frequent measurement method – an average using quarterly measurement days. This method also allows for more frequent measurement days to be used, such as daily, weekly or monthly measurement days.
Assets and liabilities must be valued in accordance with the accounting standards, which incorporate the international financial reporting standards. These values should be recorded in the entity's books of account. However, it is permissible to revalue assets for thin capitalisation purposes and not for accounting purposes.
The values of assets and liabilities used by a group when calculating its thin capitalisation position are based on information that would be contained in a set of consolidated accounts prepared in accordance with the accounting standards.
Because the consolidation rules only allow 100% owned entities to consolidate, the consolidated accounts prepared for accounting purposes may not be able to be used, without modification, for thin capitalisation purposes. The accounts are to take into account only those entities that can be grouped under the consolidation rules.
For income years commencing on or after 1 January 2009, calculations made for thin capitalisation purposes, in relation to identifying and valuing an entity's assets, liabilities and equity capital, must be made using the Australian equivalents to International Financial Reporting Standards (AIFRS) with modifications for non-ADI entities as set out in sections 820-682, 820-683 and 820-684 of the ITAA 1997. The modifications applicable to ADIs are set out in sections 820-300 and 820-310 of the ITAA 1997.
- sections 820-682, 820-683 and 820-684 of the ITAA 1997 for non-ADIs
- sections 820-300 and 820-310 of the ITAA 1997 for ADIs.
For more information about average values and valuation methods, see Average values for maximum debt level or minimum capital level.
The rules provide three methods for working out average values.