House of Representatives

Tax Laws Amendment (2007 Measures No. 3) Bill 2007

Tax Laws Amendment (2007 Measures No. 3) Act 2007

Explanatory Memorandum

(Circulated by authority of the Treasurer, the Hon Peter Costello MP)

Chapter 5 Thin capitalisation

Outline of chapter

5.1 Schedule 5 to this Bill extends by one year a transitional period relating to the application of accounting standards under the thin capitalisation rules.

Context of amendments

5.2 The thin capitalisation rules in Division 820 of the Income Tax Assessment Act 1997 are designed to ensure that both Australian and foreign-owned multinational entities do not allocate an excessive amount of debt to their Australian operations. The rules operate to disallow a proportion of otherwise deductible finance expenses (eg, interest) where the debt used to fund the Australian operations exceeds certain thresholds.

5.3 In calculating its thin capitalisation 'position', an entity is required to determine its assets, liabilities and equity capital.

5.4 Under the thin capitalisation rules, an entity's assets, liabilities and equity capital must be determined and valued in accordance with 'accounting standards', which has the same meaning as in the Corporations Act 2001 .

5.5 On 1 January 2005 Australia adopted new accounting standards, known as Australian Equivalents to International Financial Reporting Standards , replacing the previous Australian Generally Accepted Accounting Principles .

5.6 Differences between Australian Equivalents to International Financial Reporting Standards and Australian Generally Accepted Accounting Principles in the recognition and/or valuation of certain assets, liabilities and equity capital items, impact on the thin capitalisation calculations of a number of entities.

5.7 In view of this, the Government legislated a three-year transitional period during which entities can choose, on an annual basis, to use either Australian Equivalents to International Financial Reporting Standards or Australian Generally Accepted Accounting Principles to make calculations required under the thin capitalisation rules.

5.8 The transitional arrangements are set out in section 820-45 of the Income Tax (Transitional Provisions) Act 1997 and apply to an entity from its first income year commencing on or after 1 January 2005.

Summary of new law

5.9 This amendment will extend the transitional period by one year, such that the transitional arrangements will apply to four consecutive income years of an entity beginning on or after 1 January 2005.

Detailed explanation of new law

5.10 The extension of the transitional period means that entities can choose, on an annual basis, to use either Australian Equivalents to International Financial Reporting Standards or Australian Generally Accepted Accounting Principles (and, in the case of Authorised Deposit-taking Institutions, pre-1 January 2005 prudential standards) for four consecutive income years beginning on or after 1 January 2005. [Schedule 5, item 1, subsection 820-45(1 )]

5.11 Therefore, for example, for an entity with an income year commencing on 1 July, the transition period will expire on 30 June 2009, rather than 30 June 2008.

Application and transitional provisions

5.12 This amendment will apply from Royal Assent.


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