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10.2. The concept of and requirement for transfers entries in the balance of payments were discussed in paragraph 9.1. Capital transfers are those entries required to offset transactions recorded for forgiveness of a liability by a creditor, the provision of cash when linked to a change in ownership of fixed assets, or the transfer in kind of ownership of a fixed asset without a quid pro quo, i.e. where no specific recompense in the form of goods, services, income or financial items is provided in exchange. Unlike current transfers, they are not directly related to the processes of production and consumption.
10.3. Capital transfers are primarily classified to two institutional sectors, general government and other. Within the general government sector, capital transfers are further classified to the standard components: debt forgiveness and other transfers. For other sectors, the standard components are migrants’ transfers, debt forgiveness and other. Table 10.2 shows the standard components of the capital account.
10.4. Debt forgiveness refers to a financial liability of a debtor which is formally cancelled (through a contractual arrangement) by the creditor. The balance of payments reflects a reduction in the liability in the financial account of the debtor, offset by a capital transfer. This treatment is only applicable to debt that is formally forgiven and needs to be clearly distinguished from debt which is written off by the creditor due to the fact that the creditor is unlikely to be able to enforce the collection of the liability. The latter is treated not as a capital transfer, but as an other volume adjustment in the level of debt outstanding in international investment position statistics. To date, there have been no significant Australian examples of debt forgiveness, and so this component is shown with nil entries.
10.5. Migrants’ transfers constitute, for Australia, the most significant component of the capital account. Migrants are defined as individuals (other than students, medical patients or diplomatic, military or similar personnel stationed abroad) who move to a new country and are expected to stay there for at least one year. In principle, migrants’ transfers include all the net worth of the migrant in his or her former persona as a non-resident (immigrant) or resident (emigrant). Net worth includes household and personal effects, movable capital equipment, funds transferred by the migrant at the time of change of residency, and the ownership of real estate and investments, less any financial liabilities. Transfers of personal effects and equipment should be recorded as imports of goods by the economy receiving the immigrant, with an offset in migrants’ transfers. Generally the amounts involved in migrants’ transfers of goods are not large, and no attempt has been made to measure these in the goods account of the Australian balance of payments, so that no offsetting capital transfers entries are required. Funds transferred and other assets and liabilities should be recorded, by the economy receiving the immigrant, as an increase in financial assets (or reduction in liabilities) offset by a migrant’s transfer. Generally, however, only the cash transactions are captured in the financial account, and therefore capital transfers have so far only been required to offset this element of migrants’ funds.
10.7. Other transfers include, in the general government sector, investment grants in cash or kind made by the Australian Government to non-residents (other transfers debit). These include the direct provision of roads, buildings and other structures, transport equipment, machinery, other equipment, or finance to cover the costs of acquiring such assets. In practice only those grants which are clearly dedicated to specific projects, such as buildings or other structures, are included in capital transfers, and it is possible that some funds which may finance fixed investment are included in current transfers. As Australia is not a recipient of foreign aid, similar data are not estimated on the credit side. While other transfers conceptually include capital taxes (inheritance taxes, death duties and gift taxes) levied by foreign governments on the values of assets, in practice these items are not significant and no estimates are included in Australia’s capital account statistics. In practice, the amounts may be included indistinguishably in current transfers debits, or on a net basis in current transfers credits. Compensation payments by governments to non-residents, for extensive damages to capital assets (oil spills, explosions and other) not covered by insurance policies, would also be included here if such transactions occurred.
Valuation and time of recording
10.9. In concept, the valuation and the time of recording of capital transfers in the balance of payments are the same as for current transfers (see paragraphs 9.8 to 9.10). Data on the Australian Government’s foreign aid program come from the Government Ledgers, which record cash payments and therefore do not necessarily reflect the accrual principle that capital transfers are recorded in the same period as the transactions they offset. This may give rise to some minor asymmetry.