Entity categories

About this section

This section provides information on how to categorise an entity to determine which thin capitalisation rules apply.

General class investor

Effective for income years beginning on or after 1 July 2023, the new thin capitalisation regime introduces the 'general class investor' definition. Broadly, the general class investor definition represents a consolidation of the previous 'outward investor (general)', 'inward investment vehicle (general)' and 'inward investor (general)' categories. General class investors do not include financial entities and authorised deposit taking institutions (ADIs).

An entity is a general class investor for an income year if, and only if:

for a period that is all or part of the income year, the entity is not any of the following:
- an outward investing financial entity (non-ADI)
- an inward investing financial entity (non-ADI)
- an outward investing entity (ADI)
- an inward investing entity (ADI), and
assuming that the entity were a financial entity for all of the income year, it would be, for the income year, any of the following
- an outward investing financial entity (non-ADI)
- an inward investing financial entity (non-ADI).

Note: An Australian entity that is not a financial entity or an ADI will be a general class investor if it is an associate entity of one or more of the following:

a general class investor that, assuming it were a financial entity, would be an outward investing financial entity (non-ADI)
an outward investing financial entity (non-ADI)
an outward investing entity (ADI).

For more information, see:

General class investors
subsection 820-46(2) of the ITAA 1997
subsection 820-85(2) and (2BA) of the ITAA 1997.

Outward investing financial entity (non-ADI)

An entity is an outward investing financial entity (non-ADI) for a period that is all or a part of an income year if satisfies the following 2 conditions throughout that period:

it is a financial entity, and
it is one or more of the following
- an Australian controller of at least one Australian controlled foreign entity
- an Australian entity that carries on business overseas through one or more overseas permanent establishments
- an Australian entity that is an associate entity of another Australian entity that is an outward investing financial entity (non-ADI) or an outward investing entity (ADI).

However, an entity is not an outward investing financial entity (non-ADI) for a period that is all or part of an income year if it is a general class investor for that year.

For the purposes of determining whether an Australian entity is an associate entity of another Australian entity that is an outward investing financial entity (non-ADI), assume the other entity is a financial entity for all of the income year. This assumption ensures that an Australian entity will be subject to the thin capitalisation rules if it is an associate entity of a general class investor that, assuming it were a financial entity, would be an outward investing financial entity (non-ADI).

For more information, see subsection 820-85(2) & (2BA) of the ITAA 1997.

Inward investing financial entity (non-ADI)

An entity is an inward investing financial entity (non-ADI) if it is an:

inward investment vehicle (financial) – an Australian entity that is controlled by a foreign entity or foreign entities
inward investor (financial) – a foreign entity. Although all foreign entities are inward investors, the thin capitalisation rules only affect foreign entities
- with an Australian permanent establishment or other Australian income producing assets
- that are claiming debt deductions.

However, an entity is not an inward investing financial entity (non-ADI) for a period that is all or part of an income year if it is a general class investor for that year.

For more information, see subsection 820-185(2) of the ITAA 1997.

Outward investing entity (ADI)

An entity is an outward investing entity (ADI) for a period that is all or a part of an income year if throughout that period the entity is an ADI entity to which one of the following applies:

the entity is an Australian controller of at least one Australian controlled foreign entity
the entity is an Australian entity that carries on a business overseas at or through one or more overseas permanent establishments
the entity is an Australian entity that is an associate entity of another entity that is one of the following:
- an outward investing financial entity (non-ADI), or
- outward investing entity (ADI), or
- a general class investor that, if it were assumed that it were a financial entity, it would be an outward investing financial entity (non-ADI).

However, an entity is not an outward investing entity (ADI) for a period that is all or a part of an income year if it is a general class investor for that year.

For more information, see subsection 820-300(2) of the ITAA 1997.

Inward investing entity (ADI)

An entity will be an inward investing entity (ADI) for a period that is all or part of an income year if throughout that period the entity is a foreign bank which carries on its banking business in Australia at or through one or more Australian permanent establishments.

However, an entity is not an inward investing entity (ADI) for a period that is all or a part of an income year if it is a general class investor for that year.

For more information, see subsection 820-395(2) of the ITAA 1997.

Financial entities and ADI entities

Financial entity

A financial entity is an entity, other than an ADI, that is any of the following:

a registered corporation under the Financial Sector (Collection of Data) Act 2001 that carries on a business of providing finance, but not predominantly for the purposes of providing finance directly or indirectly to, or on behalf of, the entity's associates and derives all or substantially all of its profits from that business
a securitisation vehicle
an entity that is either
- a financial services licensee, within the meaning of the Corporations Act 2001, whose licence covers dealings in at least one of the financial products mentioned in paragraphs 764A(1)(a), (b) and (j) of that Act or dealings in derivatives
- both of the following
  - exempt under paragraph 911A(2)(h) or (l) of the Corporations Act 2001 from the requirement to hold an Australian financial services licence for dealings in at least one of those financial products or dealings in such derivatives
  - carrying on a business of dealings in securities or such derivatives, but not predominantly for the purposes of dealing in securities or such derivatives with, or on behalf of, the entity's associates.

For more information, see subsection 995-1(1) of the ITAA 1997.

ADI entity

An ADI entity is a body corporate that is an authorised deposit taking institution for the purposes of the Banking Act 1959.

Certain financial entities can elect to be treated as an ADI under the thin capitalisation rules. The conditions for making this election are explained in Electing to use the ADI rules.

Entities that are both outward and inward investing entities

If an entity is both an outward investing entity and an inward investing entity, the rules for outward investing entities apply. For example, if an Australian resident entity is foreign controlled and carries on business through an overseas permanent establishment, the rules for outward investing entities apply subject to 2 qualifications:

the entity is not able to apply the assets threshold test in section 820-37 of the ITAA 1997.
the entity may choose to apply a worldwide gearing debt test provided that certain requirements are met, including a requirement that the entity’s Australian assets represent no more than 50% of the entity’s statement worldwide assets.

The following tables summarise the rules explained in this section. They also tell you which section explains how to apply the thin capitalisation rules to the type of entity you are dealing with.

Table 2: How to categorise the entity and where to find the rules for different entity types
Entity type	Financial entity	ADI entity
Outward investing entity	Outward investing financial entity (non-ADI)	Outward investing entity (ADI)
Inward investment vehicle	Inward investment vehicle (financial)	Not applicable
Inward investing entity	inward investor (financial)	Inward investing entity (ADI)
Outward investing entity and inward investment vehicle	Outward investing financial entity (non-ADI)	Outward investing entity (ADI)

For general class investors assume the entity is a financial entity and then classify as outward or inward financial entity as above.

Table 3: How to categorise a financial entity that has elected to apply the ADI rules and where to find the rule
Entity type	Elected classification and rules
Outward investing financial entity (non-ADI)	Outward investing entity (ADI). The rules in Subdivision 820-D of the ITAA 1997 apply. Refer to outward investing entity (ADI).
Inward investment vehicle (financial)	Outward investing entity (ADI). The rules in Subdivision 820-D of the ITAA 1997 apply Refer to outward investing entity (ADI).
Inward investor (financial)	Inward investing entity(ADI). The rules in Subdivision 820-E of the ITAA 1997 apply Refer to inward investing entity (ADI).
Outward investing financial entity (non-ADI), and inward investment vehicle ( financial)	Outward investing entity (ADI). The rules in Subdivision 820-D of the ITAA 1997 apply Refer to outward investing entity (ADI).