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Thin capitalization rules to be amended to accommodate IFRS — Orbitax Tax News & Alerts

On 12 September 2007, the Minister for Revenue announced that the thin capitalization rules will be amended to rectify the potentially negative impact of the adoption of Australian equivalents of the International Financial Reporting Standards (AIFRS).

Under the current thin capitalization rules, accounting standards are required to be used for the valuation of assets, liabilities and equity. AIFRS may result in different values, in particular for intangible assets, income taxes and employee benefits.

A transitional period during which taxpayers may choose to value their assets, liabilities and equity under AIFRS or the pre-IFRS Australian accounting standards expires on 31 December 2008. The proposed amendments will replace the transitional arrangements.

The amendments will allow taxpayers to depart from AIFRS standards on intangible assets (AASB 138). Further, the amendments will require taxpayers to disregard for the thin capitalization purposes the application of AIFRS standards on income taxes to the extent of the recognition of deferred tax balances (AASB 112), and employee benefits to the extent of the recognition of surpluses and deficits in some superannuation funds (AASB 119).