The forgotten CGT events: Are asset revaluation reserve distributions by trustees of discretionary trusts capital gains?

It is the present practice that asset revaluation reserve distributions by trustees of discretionary trusts are not taxed in Australia. Are such distributions not meant to be taxed, or have relevant sections in the Income Tax Assessment Acts been overlooked? This article will review how trustees of discretionary trusts perform asset revaluation reserve distributions. It then challenges the current accepted view that they can be distributed tax-free to discretionary beneficiaries by analysing relevant CGT events, which the authors regard as forgotten events. It will be submitted that a discretionary beneficiary in receipt of an asset revaluation reserve distribution may have a capital gain which is required to be included in its assessable income. This liability for tax is regardless of the government's recent introduction of s 109XA to address the practice of asset revaluation reserve distributions bypassing the operation of Div 7A of the ITAA 1936 with such distributions.

Asset revaluations and earnings management: Evidence from Australian companies

This paper examines the association between asset revaluations and discretionary accruals (a proxy for earnings management) using a sample of the largest 300 Australian companies. The results from this study indicate that the revaluation of non-current assets is positively associated with discretionary accruals. This finding is consistent with the argument that revaluation of assets reflects higher agency problems in the form of increased earnings management. Additional findings are that discretionary accruals are higher for firms reporting their non-current assets at fair values appraised by directors, than those of firms that use external appraisers. As well, the choice of auditors and the strength of corporate governance can constrain the opportunistic behaviour of managers in the accounting choice to revalue non-current assets.

Fair values and audit fees: Evidence from asset revaluations in Australia

This paper examines the association between the level of audit fees paid and asset revaluations, one use of fair value accounting. This Australian study also investigates attributes of asset revaluations and the association with the level of audit fees paid. We find that firms choosing the revaluation model incur higher audit fees than those that chose the cost model; asset revaluations made by directors lead to the firm incurring higher audit fees than for those made by external independent appraisers; and revaluation of investment properties leads to lower audit fees. The findings suggest that asset revaluations can result in higher agency costs and audit fees vary with the reliability of the revaluations and the class of assets being revalued.

Reaction to the mandatory write-down provisions of AASB 1010 : accounting for the revaluation of non-current assets

Commentators in the financial press claimed that the amendments to AASB 1010, Accounting for the Revaluation of Non-Current Assets, issued in September 1991, would have “disastrous” implications for the accounts of companies. This paper is concerned with whether the amendments did indeed affect asset write-down activities. An analysis of write-down practices of 75 Australian companies before and after the amendments were operative suggests that the commentators' judgment could have been hasty.