NO.002

THIN CAPITALISATION — INTERNATIONAL FINANCIAL REPORTING STANDARDS

Following the adoption of International Financial Reporting Standards (IFRS)

on 1 January 2005, the Government will provide a three-year transitional period

for the purposes of the thin capitalisation regime. During the transitional

period, taxpayers will be able to undertake their safe harbour calculation using

Australian General Accepted Accounting Principles as they existed pre 1 January

2005.

The transitional period will provide sufficient time for the Government to

examine whether the existing thin capitalisation rules are appropriate following

the adoption of IFRS.

Background

The thin capitalisation regime seeks to ensure that multinationals do not

allocate an excessive amount of debt to their Australian operations, thereby

claiming excessive income tax deductions. Most taxpayers assess their thin capitalisation

position on the basis of the safe harbour debt test. This rule allows taxpayers

a debt-to-asset ratio of up to 75 per cent. Where a taxpayer exceeds this ratio,

a portion of their interest expense deductions is denied unless they can satisfy

the worldwide gearing test or the arm’s length test.

MELBOURNE

24 January 2005

Contact: Amanda Kennedy

03 9650 0244