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Thin capitalisation

Thin capitalisation: valuation of assets

In the 2018-19 Budget, the Government announced that it will tighten Australia’s thin capitalisation rules by requiring entities to align the value of their assets for thin capitalisation purposes with the value included in their financial statements.

The Budget measure description can be found in Budget Paper 2.

This will remove the ability for entities to:

  • revalue assets to a value different to that disclosed in their financial statements; and
  • recognise certain assets that cannot be recognised for accounting purposes.

The Australian Taxation Office has provided guidance on how it will administer this measure in relation to income tax returns lodged prior to the enactment of relevant legislation.

To further assist entities in planning their affairs during this interim period, Treasury sets out below the policy principles that will be used, regarding the start date and transitional period.

This is a statement of policy intent only. The measure will only become law once it has been passed by the Parliament and received Royal Assent.

Policy principles

The measure will apply to income years commencing on or after 1 July 2019. That is, for income years commencing on or after 1 July 2019, all entities will be required to align the value of their assets for thin capitalisation purposes with the value contained in their financial statements.

Valuations that were made prior to 7:30PM (AEST) on 8 May 2018 may be relied on until the beginning of an entity’s first income year commencing on or after 1 July 2019.

That is, for the period between the Budget announcement and the last day before the start of the income year commencing on or after 1 July 2019 entities may use the value reflected in their most recently completed compliant valuation for thin capitalisation purposes (or can revert to using the relevant financial statement value). The value of those assets will effectively be ‘frozen’ at the value reflected in their most recently completed compliant valuation, for thin capitalisation purposes, prior to 7:30 PM (AEST) on 8 May 2018. Affected entities will not be required to undertake further valuations for thin capitalisation purposes.

A valuation will be regarded as completed and compliant if it satisfies the requirements of Subdivision 820-G of the Income Tax Assessment Act 1997 before 7:30PM (AEST) on 8 May 2018.

This measure will not affect the application of the accounting standards. That is, there will be no changes to an entity’s ability to revalue assets in their financial statements in accordance with the accounting standards.

The Government will release exposure draft legislation for public consultation at the earliest opportunity.