Announced as a measure in the federal budget, the proposed legislation aims to tighten thin capitalisation rules by requiring an entity to use the value of the assets and liabilities that are used in its financial statements.
Further, the ability for an entity to revalue its assets specifically for thin capitalisation purposes will be removed; and non-ADI foreign-controlled Australian tax consolidated groups and multiple entry consolidated groups that have foreign investments or operations will be treated as both outward investing and inward investing entities.
Speaking to Accountants Daily, Thomson Reuters senior tax writer Jerry Reilly said the proposed legislation comes after thin capitalisation revaluations doubled after the reduction in the safe harbour gearing ratio.
“Back in 2014 the gearing ratio allowed under the safe harbour debt amount was reduced from to 1.3:1 to 1.5:1 for non-financial entities. At that time it was foreseen that entities with significant amounts of debt, which had borrowed up to the old safe harbour limit, would have to restructure their financing or look at using the arm's length debt method,” said Mr Reilly.
“However, according to the ATO, some entities responded to the lower safe harbour gearing ratio by increasing the value of their assets by undertaking revaluations of certain assets either for accounting purposes or for thin capitalisation purposes only. This was reflected in ATO figures which revealed that thin capitalisation-only revaluations more than doubled to $122 billion in the year following the reduction in the safe harbour gearing ratio.
“These revaluations were possible because, for some assets, such as internally generated intangible assets, exceptions applied to the general rule that an entity was required to comply with the accounting standards in determining the value of its assets, liabilities and equity capital for thin capitalisation purposes.”
Correspondingly, the amendments in the legislation will remove these exceptions, with the result that any revaluation or recognition of assets and liabilities must comply with the accounting standards, said Mr Reilly.
Stakeholders are invited to obtain a copy of the draft legislation or provide their feedback on the Treasury website.