Jenny Wong discusses proposed legislation which removes the ability to revalue assets solely for thin capitalisation purposes.
If you have revalued your assets for thin capitalisation purposes in the past, you may be affected by proposed restrictions under the new exposure draft legislation released 1 August 2018. This would reduce the amount of allowable tax-deductible debt to fund your Australian operations.
Today I am discussing the amendment removing the ability to revalue assets solely for thin capitalisation purposes.
I will talk about the other amendment, relating to foreign controlled Australian tax consolidated groups with outbound operations, next time. The amendment will ensure Australian entities align the value of their assets for thin capitalisation purposes with the value in their financial statements.
Currently, the entity can depart from the accounting values and value its assets differently from its financial statements. This is now being paired back to aligning the valuations for thin capitalisation purposes with the values in the accounts due to, according to the explanatory materials, a notable increase in the use of asset revaluations by taxpayers to generate additional debt capacity.
All entities will be required to align the value of their assets for thin capitalisation purposes with the value contained in their financial statements for income years commencing on or after 1 July 2019. There is a transitional rule. This rule will freeze the value of revalued assets at the entity’s most recent (thin capitalisation compliant) valuation made before the transition time (8 May 2018). Those revaluations can only be relied upon by the entity for income years beginning before 1 July 2019.
The explanatory material provides a helpful example of Tea Co that prepares financial statements under an Australian law and has a 30 June year end. Tea Co accounts for its assets using a ‘cost, less depreciation’ methodology in its financial statements. Tea Co acquired an asset that cost $100 million in 2016. Prior to 8 May 2018 Tea Co revalued the asset for thin capitalisation purposes to $110 million. The fair value of the asset at 30 June 2018 is $90 million. However, under the transitional rule, for the purposes of applying the thin capitalisation rules in the 2017-18 and 2018-19 income years only, Tea Co may rely on the $110 million revaluation.
Submissions on the exposure draft are due 17 August 2018. If you have any concerns or issues, please contact us.