How to apply step 4
The worldwide gearing test is available to outward investing financial entity (non-ADI)'s that are not also foreign controlled. This test allows Australian operations of an entity, in certain circumstances, to be geared up to the same level as the gearing of the Australian entity’s worldwide group. The gearing of the entity’s worldwide group is determined by reference to method statements contained in section 820-110 of the ITAA 1997. The worldwide group consists of the Australian entity and the Australian controlled foreign entities for which the Australian entity is an Australian controller.
Table 14: Outward investing financial entity (non-ADI)'s step 4 and Worksheet 7: Outward investing financial entity (non-ADI)'s step 4 explain how to calculate the worldwide gearing debt amount.
If the entity has any associate entities, you also need to work through Table 15: Outward investing financial entity (non-ADI)'s step 4A and Worksheet 8: Outward investing financial entity (non-ADI)'s step 4A.
For more information, see subsection 820-110(2) of the ITAA 1997.
If the worldwide equity amount (calculated at step 4.2 below) is a nil amount, the worldwide gearing debt amount cannot be used by the entity as a measure of its maximum allowable debt for the income year. If this is the case, the entity must instead calculate its maximum allowable debt for the income year, use the safe harbour debt amount – see steps 2 and 3.
Notes:
- If an entity is an outward investing financial entity (non-ADI) and is also foreign controlled, the worldwide gearing debt amount is the result of applying the method statement in section 820-111 of the ITAA 1997.
- An entity that is the head company of an Australian tax consolidated group or multiple entry consolidated group will be classified as both outward investing and inward investing entity if it
- is foreign controlled
- holds investments in a foreign entity or has a foreign permanent establishment.
Explanation
Step 4 assumes you have completed Worksheet 3: Outward investing financial entity (non-ADI)'s step 2 – the total debt amount calculation. If you have not, you need to complete steps 2.1 to 2.9 in Worksheet 3: Outward investing financial entity (non-ADI)'s step 2, ignoring any amounts attributable to the entity's overseas permanent establishments.
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Steps |
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Step 4.1: Calculate the entity's worldwide debt for the income year. Insert this amount at GG on Worksheet 7: Outward investing financial entity (non-ADI)'s step 4. |
Worldwide debt is the sum of the debt interests issued by the Australian entity and its Australian controlled foreign entities, other than debt interests issued to each other. |
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Step 4.2: Calculate the entity's worldwide equity for the income year. Insert this amount at HH on Worksheet 7: Outward investing financial entity (non-ADI)'s step 4. |
Worldwide equity is the equity capital of the Australian entity and its Australian controlled foreign entities, other than equity interests held in each other. |
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Step 4.3: Divide the amount at GG by the amount at HH. This is the worldwide gearing ratio. Insert the result at JJ on Worksheet 7: Outward investing financial entity (non-ADI)'s step 4. |
Dividing the worldwide debt by the worldwide equity establishes the worldwide gearing ratio. |
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Step 4.4: Insert the amount of JJ at KK on Worksheet 7: Outward investing financial entity (non-ADI)'s step 4. |
N/A |
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Step 4.5: Add 1 (one) to the amount at KK. Insert the result at LL on Worksheet 7: Outward investing financial entity (non-ADI)'s step 4. |
Steps 4.5 and 4.6 convert the ratio into a fraction, which is later applied to the entity's net Australian assets. |
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Step 4.6: Divide the amount at KK by the amount at LL. Insert the result at MM on Worksheet 7: Outward investing financial entity (non-ADI)'s step 4. |
N/A |
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Step 4.7: Multiply the amount at MM by the result at K (from the total debt calculation on Worksheet 3: Outward investing financial entity (non-ADI)'s step 2). Insert the result at NN on Worksheet 7: Outward investing financial entity (non-ADI)'s step 4. |
This applies the ratio, expressed as a fraction, to net Australian assets. This is calculated at K on Worksheet 3: Outward investing financial entity (non-ADI)'s step 2 – the total debt amount calculation – see step 2.9. |
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Step 4.8: Transfer the amount at ZC on Worksheet 3: Outward investing financial entity (non-ADI)'s step 2 to ZC on Worksheet 7: Outward investing financial entity (non-ADI)'s step 4. |
This is the zero-capital amount and was worked out at ZC on Worksheet 3: Outward investing financial entity (non-ADI)'s step 2 – step 2.8. This increases the worldwide gearing debt amount by the amount representing assets against which no capital is required to be held. It mirrors the concession in the total debt amount calculation. |
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Step 4.9: If the entity does not have any associate entities that are non-ADI financial outward or inward investors, insert 0 (zero) at PP on Worksheet 7: Outward investing financial entity (non-ADI)'s step 4. Otherwise, calculate the average value of the entity's associate entity excess amount – see Worksheet 8: Outward investing financial entity (non-ADI)'s step 4A. Transfer the amount at PP on Worksheet 8: Outward investing financial entity (non-ADI)'s step 4A to PP on Worksheet 7: Outward investing financial entity (non-ADI)'s step 4. |
This increases the worldwide gearing debt amount by the associate entity excess amount. The average associate entity excess amount is worked out at PP on Worksheet 7: Outward investing financial entity (non-ADI)'s step 4. If the entity does not have any associate entities that are non-ADI outward investors or non-ADI inward investors, the associate entity excess amount is zero. |
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Step 4.10: Calculate the entity's worldwide gearing debt amount by adding the amounts at NN, ZC and PP. |
The worldwide gearing debt amount represents the fraction of assets, increased by the zero-capital amount and the associate entity excess amount. |
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Steps |
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Step 4.1: Worldwide debt |
(GG) __________ |
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Step 4.2: Worldwide equity |
(HH) __________ |
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Step 4.3: GG ÷ HH |
(JJ) __________ |
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Step 4.4: Insert the amount of JJ at KK |
(KK) __________ |
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Step 4.5: KK + 1 |
(LL) __________ |
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Step 4.6: KK ÷ LL |
(MM) __________ |
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Step 4.7: MM × the amount at K on Worksheet 3: Outward investing financial entity (non-ADI)'s step 2 |
(NN) __________ |
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Step 4.8: Average zero-capital amount from ZC on Worksheet 3: Outward investing financial entity (non-ADI)'s step 2 |
(ZC) __________ |
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Step 4.9: Average associate entity excess amount from PP on Worksheet 8: Outward investing financial entity (non-ADI)'s step 4A |
(PP) __________ |
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Step 4.10: Worldwide gearing debt amount = NN + ZC + PP |
__________ |
If the entity's adjusted average debt is equal to or less than this amount, the entity is not disallowed any debt deductions under the thin capitalisation rules. You do not have to complete any more calculations.
If the entity's adjusted average debt is more than the worldwide gearing debt amount, you can choose to calculate an amount under the third party debt test for the entity. If you do not want to calculate a third party debt test amount you can use the worldwide gearing debt amount as the maximum allowable debt amount and debt deductions will be disallowed on this basis – see step 5.
Calculating PP: The average associate entity excess amount for the worldwide gearing debt amount
Table 15: Outward investing financial entity (non-ADI)'s step 4A and Worksheet 8: Outward investing financial entity (non-ADI)'s step 4A set out how to calculate the amount at PP of Worksheet 7: Outward investing financial entity (non-ADI)'s step 4 – the average associate entity excess amount.
If the entity does not have any associate entities, do not complete this step and show zero at PP on Worksheet 7: Outward investing financial entity (non-ADI)'s step 4.
This is equivalent to step 2.12 in the total debt amount calculation. The only difference is that, when calculating the premium excess amount, the gearing ratio is applied rather than the 15:1 ratio. The attributable safe harbour excess amount is the same and can be transferred directly from Worksheet 4: Outward investing financial entity (non-ADI)'s step 2A.
For more information, see section 820-920 of the ITAA 1997.
Note: An Australian entity will always be an outward investor if it is an associate entity of an outward investor.
Explanation: Calculate the average associate entity excess amount for the worldwide gearing debt amount
If the entity has more than one associate entity, repeat steps 4A.1 to 4A.6 for each associate entity on each of the investing entity's measurement days. Step 4A assumes you have completed Worksheet 4: Outward investing financial entity (non-ADI)'s step 2A. If you have not, you need to complete steps 2A.1, 2A.2 and 2A.4 to 2A.10, ignoring any amounts attributable to overseas permanent establishments of the investing entity or associate entities.
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Steps |
Comments |
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Step 4A.1: Transfer the amount at N on Worksheet 4: Outward investing financial entity (non-ADI)'s step 2A to N on Worksheet 8: Outward investing financial entity (non-ADI)'s step 4A. |
This is the value, on a particular measurement day, of the equity the entity has invested in the associate entity, excluding debt interests. This amount has already been worked out at N on Worksheet 4: Outward investing financial entity (non-ADI)'s step 2A (step 2A.1) and can be transferred directly from there. |
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Step 4A.2: Transfer the amount at P on Worksheet 4: Outward investing financial entity (non-ADI)'s step 2A to P on Worksheet 8: Outward investing financial entity (non-ADI)'s step 4A. |
This is the value, on a particular measurement day, of the associate entity's equity capital attributable to the equity interests the investing entity holds in the associate entity, excluding the value that represents controlled foreign entity equity of the investing entity. This amount has already been worked out at P on Worksheet 4: Outward investing financial entity (non-ADI)'s step 2A (step 2A.2) and can be transferred directly from there. |
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Step 4A.3: Calculate the premium excess amount by deducting the amount at P from the amount at N and multiplying the result by the amount at MM on Worksheet 7: Outward investing financial entity (non-ADI)'s step 4. Insert the result at QQ on Worksheet 8: Outward investing financial entity (non-ADI)'s step 4A. |
n/a |
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Step 4A.4: Transfer the amount at X on Worksheet 4: Outward investing financial entity (non-ADI)'s step 2A to X on Worksheet 8: Outward investing financial entity (non-ADI)'s step 4A. |
This is the attributable safe harbour excess amount for an associate entity on a particular measurement day. This amount has already been worked out at X on Worksheet 4: Outward investing financial entity (non-ADI)'s step 2A (step 2A.10) and can be transferred directly from there. |
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Step 4A.5: Calculate the entity's associate entity excess amount by adding the amounts at QQ (premium excess amount) and X (attributable safe harbour excess amount). Insert the result at RR on Worksheet 8: Outward investing financial entity (non-ADI)'s step 4A. |
This is the associate entity excess amount for a single associate entity on a particular measurement day of the investing entity. |
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Step 4A.6: If the entity has only one associate entity, transfer any positive amount at RR to SS on Worksheet 8: Outward investing financial entity (non-ADI)'s step 4A. Otherwise, repeat steps 4A.1 to 4A.5 for each associate entity. Add all positive results at RR and insert at SS on Worksheet 8: Outward investing financial entity (non-ADI)'s step 4A. |
The associate entity excess amount must be worked out for each associate entity on a measurement day. Add all the positive associate entity excess amounts together to get the total associate entity excess amount for any particular measurement day. If the entity has only one associate entity, the amount at SS will be the same as the amount at RR, provided RR is positive. If RR is negative, it is disregarded. |
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Step 4A.7: Calculate SS (the total associate entity excess amount – steps 4A.1 to 4A.6) on each other measurement day. |
The associate entity excess amount is calculated for all associate entities on each of the investing entity's measurement days. |
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Step 4A.8: Calculate the entity's average associate entity excess amount by adding the results at SS for each measurement day and dividing by the number of measurement days. Insert the result at PP on Worksheet 8: Outward investing financial entity (non-ADI)'s step 4A. |
The results are added together and divided by the number of measurement days to get the average associate entity excess amount. |
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Steps |
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Step 4A.1: Investing entity's associate entity equity on a measurement day from N on Worksheet 4: Outward investing financial entity (non-ADI)'s step 2A |
(N) __________ |
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Step 4A.2: Associate entity's equity capital attributable to the investing entity's equity interests on a measurement day from P on Worksheet 4: Outward investing financial entity (non-ADI)'s step 2A |
(P) __________ If P is negative, it is taken to be nil |
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Step 4A.3: Premium excess amount (N − P) × MM |
(QQ) __________ QQ may be a negative amount |
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Step 4A.4: Attributable safe harbour excess amount from X on Worksheet 4: Outward investing financial entity (non-ADI)'s step 2A |
(X) __________ |
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Step 4A.5: Associate entity excess amount on a measurement day for one associate entity (QQ + V) |
(RR) __________ |
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Step 4A.6: Associate entity excess amount on a measurement day for all associate entities. That is, the sum of positive results at RR Now calculate the associate entity excess amount for all associate entities on the investing entity's other measurement days – see step 4A.7 |
(SS) __________ |
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Step 4A.8: The average value of the associate entity excess amount (sum of results at SS divided by the number of measurement days) |
= (PP) __________ Transfer this amount to PP on Worksheet 8: Outward investing financial entity (non-ADI)'s step 4A |