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Australia To Amend Thin Cap Rules

by Mary Swire,, Hong Kong

14 September 2007

Australian Minister for Revenue and Assistant Treasurer, Peter Dutton has announced that the government will make changes to the thin capitalisation rules in the income tax legislation, in order to address some of the adverse impacts of the adoption of Australian equivalents to International Financial Reporting Standards (AIFRS).

Under the thin capitalisation rules, entities are required to use accounting standards to value assets, liabilities and equity capital. Differences between AIFRS and the previous accounting standards (known as Australian Generally Accepted Accounting Principles or AGAAP) resulted in the thin capitalisation positions of some entities being substantially affected.

In recognition of this, the government put in place a transitional period during which entities can elect to use either AIFRS or AGAAP to make thin capitalisation calculations.

"Although the transitional period does not begin expiring until 31 December 2008, the Government acknowledges that, to facilitate business planning and decision making, it is important for entities to have adequate notice of legislative changes," Dutton stated.

"The proposed amendments will address several critical issues relating to the adoption of AIFRS, and follow extensive consultation with taxpayers and their advisers. The Government acknowledges there are other issues of concern surrounding the application of AIFRS to thin capitalisation calculations, and these will be given further consideration. Any future changes to the rules will be subject to consultation before announcement," he added.

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