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Step 5: Calculate the debt deductions disallowed

How to calculate the debt deductions disallowed if you're an inward investor (financial).

Last updated 23 July 2024

The entity's maximum allowable debt is the greater of the:

  • safe harbour debt amount from steps 2 and 3
  • worldwide gearing debt amount from step 4.

You do not necessarily have to calculate both amounts. If you do not want to calculate a worldwide gearing debt amount you can use the safe harbour debt amount as the maximum allowable debt.

If the entity's adjusted average debt is more than its maximum allowable debt, and it does not choose to rely on the third party debt test, a proportion of its debt deductions cannot be deducted. Table 49: Inward investor (financial)'s step 5 and Worksheet 41: Inward investor (financial)'s step 5 work out the proportion disallowed.

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

Table 29: Inward investor (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 the result at EE on Worksheet 23: Inward investor (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 23: Inward investor (financial)'s step 5.

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

  • all debt capital that gives rise to debt deductions in the income year or any other income year. This is the amount calculated at A on Worksheet 17: Inward investor (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 on Worksheet 17: Inward investor (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 23: Inward investor (financial)'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 entity's debt deductions for the income year.

Insert this amount at HH on Worksheet 23: Inward investor (financial)'s step 5.

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

Step 5.5: Multiply the amount at GG by the amount at HH. This is the total debt deductions disallowed for entities that do not choose to apply the third party debt test.

This calculates the amount of debt deduction disallowed for entities that do not choose to apply the third party debt test. The debt deductions that would be allowed, but for thin capitalisation, are each reduced proportionately.
Worksheet 41: Inward investor (financial)'s step 5

Steps

$

Step 5.1: Excess debt; that is, adjusted average debt minus 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 the inward investor (financial) is not allowed to deduct under the thin capitalisation rules if they do not choose to apply the third party debt test.

QC48257