An outward investing financial entity (non-ADI) entity can use one of the following 3 methods to calculate the entity's compliance with the thin capitalisation regime :
- safe harbour debt amount from steps 2 and 3
- worldwide gearing debt amount from step 4.
- Where the entity has made a choice to apply the third party debt test, the amount of debt deductions allowed are determined under that test.
Note: You do not have to calculate all amounts. For example, you can use the safe harbour debt amount as the maximum allowable debt amount if you do not want to calculate a worldwide gearing debt amount and you have not made a choice to use the third party debt test.
If the entity's adjusted average debt is more than its maximum allowable debt as calculated under the safe harbour method or worldwide gearing method, a proportion of its debt deductions cannot be deducted. Table 16: Outward investing financial entity (non-ADI)'s step 5 and Worksheet 9: Outward investing financial entity (non-ADI)'s step 5 works out the proportion of debt deductions disallowed.
For more information, see section 820-115 of the ITAA 1997.
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Steps |
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Step 5.1: Calculate the amount by which the entity's adjusted average debt exceeds its maximum allowable debt; that is, its excess debt. Insert the result at TT on Worksheet 9: Outward investing financial entity (non-ADI)'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. |
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Step 5.2: Calculate the entity's average debt. Insert this amount at UU on Worksheet 9: Outward investing financial entity (non-ADI)'s step 5. |
The average debt is the average value, for the income year, of:
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Step 5.3: Divide the amount at TT by the amount at UU. Insert the result at VV on Worksheet 9: Outward investing financial entity (non-ADI)'s step 5. |
This step works out what proportion to apply to the entity's debt deductions to calculate the amount disallowed. |
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Step 5.4: Calculate the amount of the debt deductions for the income year. Insert this amount at WW on Worksheet 9: Outward investing financial entity (non-ADI)'s step 5. |
The calculation is applied to all the entity's debt deductions for the year. |
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Step 5.5: Multiply the amount at VV by the amount at WW. This is the total debt deductions disallowed. |
This calculates the amount of debt deductions disallowed. The debt deductions that would be allowed, but for thin capitalisation, are each reduced proportionately. |
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Steps |
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Steps 5.1: Excess debt; that is, adjusted average debt minus maximum allowable debt |
(TT) __________ |
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Steps 5.2: Average debt |
(UU) __________ |
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Steps 5.3: TT ÷ UU |
(VV) __________ |
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Steps 5.4: Debt deductions for the year |
(WW) __________ |
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Steps 5.5: Total debt deductions disallowed (VV × WW) |
= __________ |
This is the amount of debt deductions the outward investing financial entity (non-ADI) is not allowed to deduct under the thin capitalisation rules.
If the entity has made a choice to apply the third party debt test, the amount of debt deductions the outward investing financial entity (non-ADI) is not allowed to deduct under the thin capitalisation rules are determined under that test.
For more information, see Worked example of calculations for an outward investing financial entity (non-ADI).