Before you start
The calculation used by outward investing financial entities (non-ADI) will depend on the method chosen for their thin capitalisation calculation.
An outward investing financial entity (non-ADI) can either calculate its maximum allowable debt or choose to apply the third part debt test.
If you make a choice to apply the third party debt test (TPDT), consider how this test works for you by reviewing the third party debt conditions.
If not using the TPDT, follow these steps to calculate the adjusted average debt and maximum allowable debt.
An outward investing financial entity (non-ADI) that elects to use the thin capitalisation rules that apply to ADI entities will need to refer to outward investing entity (ADI). For more information, see Electing to use the ADI rules.
Step 1
Broadly, the adjusted average debt of an outward investing financial entity (non-ADI) is 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 1.5. Find out more at Cost-free debt capital.
The adjusted average debt also includes liabilities arising out of arrangements for borrowing securities – see step 1.4.
Worksheet 2: Outward investing financial entity (non-ADI)'s step 1 explains how an outward investing financial entity (non-ADI) calculates its adjusted average debt.
For more information, see subsection 820-85(3) of the ITAA 1997.
Note: Ignore any amounts attributable to any of the entity's overseas permanent establishments.
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Steps |
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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 2: outward investing financial entity (non-ADI)'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 interest that does not initially give rise to debt deductions but will do so in the future. |
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Step 1.2: Calculate the average value, for that year, of all the entity's associate entity debt. Insert this amount at B on Worksheet 2: Outward investing financial entity (non-ADI)'s step 1. |
Average debt capital is then reduced by the associate entity debt. |
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Step 1.3: Calculate the average value, for that year, of all the entity's controlled foreign entity debt. Insert this amount at C on Worksheet 2: Outward investing financial entity (non-ADI)'s step 1. |
Average debt capital is further reduced by any amounts lent to controlled foreign entities of which the entity is an Australian controller. |
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Step 1.4: Calculate the average value, for that year, of the entity's borrowed securities amount. Insert this amount at D on Worksheet 2: Outward investing financial entity (non-ADI)'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-buyback arrangement or securities loan arrangement. |
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Step 1.5: Calculate the average value, for that year, of any of the entity's cost-free debt capital. Insert this amount at E on Worksheet 2: Outward investing financial entity (non-ADI)'s step 1. |
Cost-free debt capital is included in adjusted average debt for integrity reasons. |
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Step 1.6: Calculate the adjusted average debt. Adjusted average debt is the result of A − B − C + D + E. |
Adjusted average debt represents total debt (A) less associate entity debt (B) and controlled foreign entity debt (C), increased by certain securities loan arrangement amounts (D) and cost-free debt capital (E). |
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Steps |
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Step 1.1: Average debt capital |
(A) __________ |
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Step 1.2: Average associate entity debt |
(B) __________ |
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Step 1.3: Average controlled foreign entity debt |
(C) __________ |
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Step 1.4: Average borrowed securities amount |
(D) __________ |
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Step 1.5: Average cost-free debt capital |
(E) __________ |
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Step 1.6: Adjusted average debt = (A − B − C + D + E) |
__________ |
The entity's adjusted average debt does not exceed its maximum allowable debt if the adjusted average debt is nil or a negative amount. If so, you do not have to complete any more 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 greatest of the safe harbour debt amount – steps 2 and 3, or the worldwide gearing debt amount – see step 4.
For more information, see Worked example of calculations for an outward investing financial entity (non-ADI).