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Australia Publishes Guidance on Valuation of Assets for the Thin Capitalisation Regime — Orbitax Tax News & Alerts

The Australia Taxation Office has guidance on the Valuation of assets for the purposes of the Thin Capitalisation regime in light of changes made by the Treasury Laws Amendment (Making Sure Multinationals Pay Their Fair Share of Tax in Australia and Other Measures) Act 2019, which received royal assent (was enacted) on 13 September 2019. The guidance concerns the obligations of taxpayers that did or did not lodge tax returns in accordance with the changes made by the Act.  

The main measures of the Act amended the Income Tax Assessment Act 1997 to tighten Australia’s thin capitalisation rules by:

  • requiring an entity to use the value of the assets, liabilities (including debt capital) and equity capital that are used in its financial statements;
  • removing the ability for an entity to revalue its assets specifically for thin capitalisation purposes; and
  • ensuring that non-ADI foreign controlled Australian tax consolidated groups and multiple entry consolidated groups that have foreign investments or operations are treated as both outward investing and inward investing entities.

The amendments relating to the valuation of assets, liabilities (including debt capital) and equity capital generally apply from 7.30 pm by legal time in the Australian Capital Territory, on 8 May 2018. The amendments relating to non-ADI foreign controlled Australian tax consolidated groups and multiple entry consolidated groups apply to income years beginning on or after 1 July 2019.

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Valuation of assets for the purposes of the Thin Capitalisation regime

As part of the 2018-19 Budget, the Government announced on 8 May 2018 that Australia’s thin capitalisation rules (contained in Division 820 of the Income Tax Assessment Act 1997) would be tightened by requiring entities to align the value of their assets for thin capitalisation purposes with the value included in their financial statements.

Administrative treatment

The ATO will accept tax returns as lodged according to current law during the period up until the proposed law change is passed by Parliament. Assessments for the relevantly impacted income years will not be reviewed until the outcome of the proposed law change is known.

Once the new law is enacted, if you have lodged according to current law you will need to review your thin capitalisation positions for the impacted years.

If your tax return was not lodged in accordance with the law change you should seek an amendment. If an increase in liability results and you request an amendment within three months of Royal Assent:

(a) no tax shortfall penalties will be applied; and

(b) any shortfall interest accrued will be remitted to base interest rate.

If you require further time to lodge an amendment you should discuss your circumstances with us.

For the avoidance of doubt, no tax shortfall penalty or interest will be remitted to the extent a tax shortfall arises as a result of failing to satisfy all the requirements of the law which prevailed prior to the enactment of the new law (for example, failure to comply with the requirements for a compliant asset valuation under section 820-680, or the record keeping requirements in Subdivision 820-L, of the Income Tax Assessment Act 1997).

If you instead chose to lodge in accordance with the proposed law change and your lodged position is subsequently determined to be wholly consistent with the legislated change, you do not need to do anything further. However, to the extent your lodged position differs from that required by the new law once enacted, you should seek an amendment and the above administrative treatment will equally apply.