Nick Sherry, Australia’s Assistant Treasurer, has released, for public consultation, draft legislation on proposed changes to the thin capitalization rules of the income tax law as they apply to authorized deposit-taking institutions (ADIs).
"The thin capitalization regime is an important tax integrity measure and this legislation will fine-tune its operation," Sherry said. "It's designed to ensure Australian and foreign owned multi-national entities do not allocate an excessive amount of global debt to their Australian operations and therefore inappropriately reduce Australian profits and tax."
"The rules operate to disallow a proportion of otherwise deductible expenses where the debt used to fund the Australian operations exceeds certain limits," he continued. "But these rules need adjustment following Australia's adoption in 2005 of International Financial Reporting Standards (AIFRS) on the thin capitalization position of ADIs."
Amendments made in 2008 adjusted for the impact of AIFRS on the thin capitalization position of non-ADI entities. The current proposed changes were announced in the 2009-10 Budget and will apply to ADIs.
It is intended that the proposed changes will have retroactive effect from January 1, 2009, when AIFRS transitional arrangements began to run out. They will clarify the circumstances in which treasury shares, the business insurance assets known as “excess market value over net assets,” and capitalized software costs are to be recognized for thin capitalization provisions.
The government is requesting further public input on the draft amendments, with a view to introducing the legislation early next year. Submissions close on January 15, 2010.
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