Proposed legislative changes
The Government has introduced a Bill (click here to view) to implement the thin capitalisation changes proposed in the 2018-19 Federal Budget.
If enacted in their current form, the changes will tighten Australia’s thin capitalisation rules by requiring taxpayers to fully comply with Australian accounting standards in identifying assets and liabilities and determining the value thereof. In particular, it will no longer be possible for an entity to a) recognise internally generated intangible items or b) revalue assets specifically for thin capitalisation purposes.
The changes are to apply to the identification and valuation of assets and liabilities after 8 May 2018. More particularly, assets first recognised or values measured after 8 May 2018 cannot be taken into account in thin capitalisation calculations for the 2018 or a later income year if the recognition or measurement of the asset is not in accordance with the accounting standards (relevantly, Australian Accounting Standard AASB 138: Intangible Assets).
However, taxpayers who have, before 8 May 2018 and consistent with the current law, recognised an internally generated intangible item as an asset for thin capitalisation purposes or determined the value of that or any other asset or liability, may continue to count that in thin capitalisation calculations for income years beginning on or before 1 July 2019. Only those existing valuations that are compliant can be relied upon. This means that all records required to be kept must be in existence prior to 8 May 2018.
Under the current thin capitalisation rules, an entity could recognise an internally generated intangible asset provided it complied with the accounting standards “to the maximum extent possible” in doing so. If the entity chooses to recognise the asset, its recognition as an asset has effect for the year in which the choice is made and each later year.
Similarly, once a value is placed on the asset, that value has effect for the year in which the choice is made and each later year. However, in order to comply with the requirements of the accounting standards ‘to the maximum extent possible” the entity would need to assess whether the carrying value should be amortised or impaired.
Assume ACo has an internally generated intangible asset, a brand name, in a prior year (i.e. prior to 8 May 2018) and chose to recognise it as an asset for thin capitalisation purposes in the amount of $10,000. Provided the choice has not been revoked, ACo would be able to continue to count the brand name as an asset for thin capitalisation purposes for the income year ending 30 June 2019. Further, the amount at which it would be taken into account would be $10,000 less accumulated amortisation and impairment adjustments.
For completeness, the proposed changes will mean that ACo will not be able to include the brand name as an asset for thin capitalisation purposes after 30 June 2019.
What should you be doing?
Significantly, these measures may adversely impact an entity’s thin capitalisation position. You should contact your Pitcher Partners representative to understand the changes and the impact they will have for your business.