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Step 5: Calculate the debt deductions disallowed

How to calculate the debt deductions disallowed for an inward investment vehicle (financial).

Last updated 23 July 2024

For an entity that has not chosen to use the third party debt test, an entity's maximum allowable debt is the greater of the:

You do not necessarily have to calculate all amounts. If you do not want to calculate the worldwide gearing debt amount or choose not to apply the third party debt test, you can use the safe harbour debt amount as your maximum allowable debt.

If the entity's adjusted average debt is more than its maximum allowable debt, a proportion of its debt deductions cannot be deducted. Table 23: Non-ADI financial inward investment vehicle's step 5 and Worksheet 16: Inward investment vehicle (financial)'s step 5 work out the proportion disallowed.

For more information, see section 820-220 of the ITAA 1997.

Table 23: Inward investment vehicle (financial)'s step 5

Steps

Comments

Step 5.1: Calculate the amount by which the entity's adjusted average debt exceeds its maximum allowable debt – that is, the excess debt.

Insert this amount at EE on Worksheet 16: Inward investment vehicle (financial)'s step 5.

The proportion of debt deductions disallowed depends on the amount by which the entity's adjusted average debt from step 1 exceeds its maximum allowable debt.

Step 5.2: Calculate the entity's average debt.

Insert this amount at FF on Worksheet 16: Inward investment vehicle (financial)'s step 5.

The average debt is the average of the following for the income year:

  • the debt capital that gives rise to debt deductions in that year or any other income year. This is the amount calculated at A in Worksheet 10: Inward investment vehicle (financial)'s step 1 (see step 1.1)
  • the entity's cost-free debt capital that is included in its adjusted average debt. This is the amount calculated at D in Worksheet 10: Inward investment vehicle (financial)'s step 1 (see step 1.4). 

Step 5.3: Divide the amount at EE by the amount at FF.

Insert the result at GG on Worksheet 16: Non-ADI financial inward investment vehicle's step 5.

This step works out what proportion to apply to the entity's debt deductions to calculate the amount disallowed.

Step 5.4: Calculate the amount of the debt deductions for the income year.

Insert this amount at HH on Worksheet 16: Inward investment vehicle (financial)'s step 5.

The calculation is applied to all the entity's debt deductions for the year.

Step 5.5: Multiply the amounts at GG by the amount at HH. This is the total debt deductions disallowed.

This calculates the amount of debt deduction disallowed. Debt deductions that would be allowed, but for thin capitalisation are each reduced proportionately.
Worksheet 16: Inward investment vehicle (financial)'s step 5

Steps

$

Step 5.1: Excess debt, that is, adjusted average debt less maximum allowable debt

(EE) ____________

Step 5.2: Average debt

(FF) ____________

Step 5.3: EE ÷ FF

(GG) ___________

Step 5.4: Debt deductions for the income year

(HH) ___________

Step 5.5: Total debt deductions disallowed (GG × HH)

= _____________

This is the amount of debt deductions an inward investment vehicle (financial) is not allowed to deduct under the thin capitalisation rules.

For more information, see Worked example of calculations for an inward investment vehicle financial (non-ADI).

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