Introduction 
 
For reporting periods commencing on or after 1 January 2005, reporting entities under the Corporations Act 2001 are required to prepare their financial statements in accordance with Australian equivalents of International Financial Reporting Standards (“AIFRS”). The introduction of AIFRS has various income tax implications particularly where provisions refer directly to accounting standards or concepts. 
 
Thin capitalisation practice statement 
 
The ATO recently released the long-awaiting practice statement, PS LA 2006/12, which provides guidance on practical issues arising from the application of the transitional rule that was introduced into the thin capitalisation rules late last year to overcome potentially adverse outcomes arising from the introduction of AIFRS. 
 
The transitional rule, section 820-45, allows taxpayers who are subject to the thin capitalisation rules to use values based on Australian accounting standards as they existed on 31 December 2004 (“AGAAP”) for thin capitalisation purposes. The measures allow taxpayers to choose, for any or all of the three income years commencing on or after 1 January 2005, to use AGAAP as a basis for undertaking thin capitalisation calculations. 
 
The transitional rule followed on from extensive Institute lobbying of the Government as well as its agencies, the Department of Treasury and the ATO. Our lobbying began with issuing an initial discussion paper in 2004 that identified the thin capitalisation regime as an area which would be immediately impacted by the introduction of AIFRS. A further submission was also made to the Government recommending the introduction of a transitional period during which taxpayers could use values of assets and liabilities determined under AGAAP for the purpose of the thin capitalisation rules. A number of meetings were held at around the same time with the office of Government Ministers as well as Treasury and the ATO to promote this position. 
 
Following the release of the transitional rule, the Institute was also involved in consultations with the ATO on the development of PS LA 2006/12. 
 
Under PS LA 2006/12, if a taxpayer chooses, under sect 820-45, to use AGAAP for any or all of the three income years commencing on or after 1 January 2005, they will not be required to prepare a full set of accounts based on AGAAP. Instead, the taxpayer will be able to make adjustments to its AIFRS accounts in order to work back to a reasonable approximation of what would have been its position under AGAAP for thin capitalisation purposes. 
 
The practice statement provides welcome guidance on how to apply the transitional rule in section 820-45 and contains some practical concessions that will minimise the compliance costs incurred by taxpayers in applying the transitional rule. We will now continue to work with Treasury and the ATO to determine what changes need to be made to the thin capitalisation regime once the transitional period ends. 
 
8 December 2006 - Submission on Treasury's discussion paper - Thin capitalisation: application of accounting standards 
 
The Institute has lodged a submission on the Treasury's discussion paper entitled "Thin Capitalisation: application of accounting standards" which deals with whether the existing thin capitalisation rules are appropriate following the adoption of Australian equivalents to International Financial Reporting Standards (AIFRS) and options once the transitional period ends. 
 
The Institute's submission on the discussion paper addresses various questions raised in the paper around:

• Which standards most directly impact on the operation of the thin capitalisation rules; 
  
• A number of option to allow departures from AIFRS; and 
  
• Possible amendments to the arm's length test.

• Thin capitalisation. The ATO is in the process of finalising a practice statement providing guidance around the transitional rules that were introduced as set out in Tax Laws Amendment (2005 Measures No. 5) Act 2005. 
  
• Treasury is also considering what changes to the thin capitalisation rules will be required when the three-year transitional period ends. 
  
• There was some discussion on a proposal to amend the Corporations Law to allow companies to pay dividends on a solvency rather than the current "profits" basis and the taxation implications that would arise from such a change. 
  
• Share capital tainting. Various submissions have been lodged with the ATO on outstanding share capital tainting issues. The main issues that the ATO has been asked to provide guidance on are:
  • What is a share capital account? 
    
  • What is a transfer for the purposes of the share capital tainting rules? 
    
  • How is the timing of a transfer determined, e.g., is it the date of the journal entry or some other date?
   
  
• Notional disqualifying accounts. It is hoped that the Government will issue a press release that will address notional disqualifying account issues. It is not known when the press release will issue. 
  
• Fixed trusts. The ATO trust working group is currently looking at this issue and is hoping to provide guidance by the end of September 2006.

• Thin capitalisation. The ATO indicated that they would be releasing shortly a practice statement providing guidance around the transitional rules that were introduced by set out in the Tax Laws Amendment (2005 Measures No. 5) Act 2005 (assented to on 19 December 2005). Those transitional rules allow taxpayers to use accounting standards as they existed before 1 January 2005 to perform thin capitalisation calculations for a period of three years. 
  
• Consolidation. Various consolidation issues arising from IFRS such as the impact of recognition of additional liabilities and the possible application of CGT event E7 have been transferred from the NTLG IFRS Subcommittee to the NTLG Consolidation Subcommittee. 
  
• UIG Interpretation 1052. The ATO advised that it was still developing a position in relation to various issues arising from UIG Interpretation 1052, which were raised at a working group meeting held on 5 December last year. 
  
• Share capital tainting. As reported in CA Tax Bulletin Edition 12/2006 (3 April 2006), the bill containing the rewritten share capital tainting rules has been delayed and, at this stage, we now expect the share capital tainting legislation to pass through parliament some time in the first half of this calendar year. 
  
• Notional disqualifying accounts. The ATO is still in the process of finalising its view on whether there is an exposure for companies under IFRS as a result of the more frequent recognition of gains and losses in respect of assets that have not been realised and the payment of franked dividends out of those unrealised reserves. When the ATO have finalised their response, Treasury will prepare draft legislation in respect of which there will be targeted consultation. 
  
• Fixed trusts. Under IFRS, some unit trusts will be required to amend their trust deeds to ensure that units continue to be treated as equity for accounting purposes. These amendments may result in taxation consequences such as resettlement of the trusts or classification of trusts as non-fixed for income tax purposes. The ATO has set up a working group to consult upon these and other trust issues.

• share capital tainting 
  
• notional disqualifying accounts; 
  
• whether there are any taxation consequences for unit trusts that are required to amend their trust deeds to ensure that units are classified as equity for accounting purposes under IFRS.