Step 2: Calculate the safe harbour capital amount

The safe harbour capital amount is a level of equity capital that an ADI must allocate to its Australian operations. This amount is based on the value of net risk-weighted assets attributable to the Australian operations. The safe harbour capital amount is broadly based on the methodology of the capital adequacy requirements prescribed by prudential regulators, for example, Australian Prudential Regulation Authority (APRA).

Table 35: Inward investing entity (ADI)'s step 2 and Worksheet 29: Inward investing entity (ADI)'s step 2 explains how to work out the safe harbour capital amount.

For more information, see section 820-405 of the ITAA 1997.

Note: You will need a copy of the prudential standards to work out the safe harbour capital amount.

Table 35: Inward investing entity (ADI)'s step 2

Steps	Comments
Step 2.1: Calculate the average value, for the income year, of all the ADI's net risk-weighted assets that are: attributable to the ADI's Australian permanent establishments through which it carries on its banking business in Australia not attributable to those Australian permanent establishment's offshore banking activities. Insert this amount at C on Worksheet 29: Inward investing entity (ADI)'s step 2.	The first step is to work out the average value of the ADI's net risk-weighted assets attributable to its Australian operations. The risk-weighted assets are its risk exposures determined in accordance with either the Australian prudential standards or the prudential standards of the foreign country in which the ADI is a resident.
Step 2.2: Calculate the safe harbour capital amount by multiplying the amount at C by 6%.	The safe harbour capital amount represents 6% of the average risk-weighted assets attributable to the Australian banking permanent establishments.

Worksheet 29: Inward investing entity (ADI)'s step 2

Steps	$
Step 2.1: Average risk-weighted assets attributable to the Australian banking permanent establishments	(C) _____________
Step 2.2: Safe harbour capital amount (C × 6%)	= _______________

If the ADI's average equity capital is equal to or more than the safe harbour capital amount, the ADI is not disallowed any debt deductions under the thin capitalisation rules. You do not have to complete any more calculations.

If the ADI's average equity capital is less than the safe harbour capital amount, you can choose to calculate an arm's length capital amount (see step 3) or you can use your safe harbour capital amount as the minimum capital amount and debt deductions will be disallowed on this basis (step 4).

For more information, see Worked example of calculations for an inward investing entity (ADI).