Before you start
The calculation used by an inward investor (financiaI) will depend on the method chosen for their thin capitalisation calculation.
If an inward investor (financial) makes a choice to apply the third party debt test, refer to the information regarding the third party debt test.
If not using the third party debt test, there are 5 steps an inward investor (financial) must complete to determine the impact of the thin capitalisation rules.
Inward investor (financial) entities are subject to certain record keeping requirements if both of the following apply:
- They are carrying on business at or through a permanent establishment.
- Total revenues of at least $2 million are attributable to that permanent establishment.
Under these requirements, financial statements, including all the necessary notes, must be prepared for its Australian permanent establishment using one of the following:
- the Australian accounting standards
- the accounting standards of the European Union, Japan, USA, UK, Canada, New Zealand
- the international accounting standards.
For more information, see section 820-960 of the ITAA 1997.
Step 1
The adjusted average debt of an inward investor (financial) is, broadly, the debt capital used in its Australian operations that gives rise to debt deductions. It does not matter whether the debt deductions arise in the year the debt interest was issued or in any other income year.
Debt that does not give rise to any deductible expenditure at any time is generally not included in adjusted average debt. However, it is included if the debt interest is cost-free debt capital – see step 1.4.
The adjusted average debt also includes assets that comprise securities loan arrangement amounts where those amounts do not otherwise qualify as debt interests – see step 1.3.
Table 23: Inward investor (financial)'s step 1 and Worksheet 35: Inward investor (financial)'s step 1 explains how an inward investor (financial) calculates its adjusted average debt.
For more information, see subsection 820- 185(3) of the ITAA 1997.
|
Steps |
Comments |
|---|---|
|
Step 1.1: Calculate the average value, for the income year, of all the entity's debt capital that gives rise to its debt deductions for that year or any other income year. Insert this amount at A on Worksheet 17: Inward investor (financial)'s step 1. |
The entity's debt capital is the average value of all the debt interests issued by the entity that give rise to debt deductions in any income year. This includes debt interests that do not initially give rise to debt deductions but will do so in the future. |
|
Step 1.2: Calculate the average value, for that year, of all the entity's associate entity debt, to the extent it is attributable to the entity's Australian permanent establishments. Insert this amount at B on Worksheet 17: Inward investor (financial)'s step 1. |
The average value of debt capital is then reduced by the associate entity debt, to the extent those amounts are attributable to the foreign entity's Australian permanent establishments. |
|
Step 1.3: Calculate the average value, for that year, of the entity's borrowed securities amount. Insert this amount at C on Worksheet 17: Inward investor (financial)'s step 1. |
The amounts included in an entity's borrowed securities amount are explained in Borrowed securities amount. Broadly, they include the entity's liabilities incurred under a repurchase agreement, sell-buy-back arrangement or securities loan arrangement. |
|
Step 1.4: Calculate the average value, for that year, of any of the entity's cost-free debt capital. Insert this amount at D on Worksheet 17: Inward investor (financial)'s step 1. |
Cost-free debt capital is included in adjusted average debt for integrity reasons. |
|
Step 1.5: Calculate the adjusted average debt. This is the result of A − B + C + D. |
Adjusted average debt represents total debt (A) less associate entity debt (B), increased by certain securities loan arrangement amounts (C) and cost-free debt capital (D). |
|
Steps |
$ |
|---|---|
|
Step 1.1: Average debt capital |
(A) ______________ |
|
Step 1.2: Average associate entity debt attributable to the Australian permanent establishment |
(B) ______________ |
|
Step 1.3: Average borrowed securities amount |
(C) ______________ |
|
Step 1.4: Cost-free debt capital |
(D) ______________ |
|
Step 1.5: Adjusted average debt (A − B + C + D) |
= _______________ |
Adjusted average debt zero or a negative amount
If the entity's adjusted average debt is zero or a negative amount, the entity has not exceeded its maximum allowable debt and it is not disallowed any debt deductions under thin capitalisation rules. You do not have to complete any further calculations.
If the entity's adjusted average debt is a positive amount, you need to calculate the entity's maximum allowable debt amount which is the greater of the:
- safe harbour debt amount (steps 2 and 3)
- worldwide gearing debt amount (step 4).