ato logo
Search Suggestion:

A

Explains thin capitalisation terms we use that begin with A.

Last updated 23 July 2024

ADI

See Authorised Deposit-taking Institution.

ADI equity capital

This is the sum of an entity's equity capital and the value of certain long-term debt interests that do not and will not at any time give rise to debt deductions. A non-ADI entity can have an amount of ADI equity capital.

ADI equity capital is used to determine:

  • adjusted average equity capital for ADI entities that are outward investing entities
  • average equity capital for ADI entities that are inward investing entities
  • consolidated groups classified as an ADI.

The ADI equity capital of an entity at a particular time is the sum of the:

  • entity's equity capital
  • total value of debt interests issued by the entity that    
    • are on issue and have been on issue for 90 days or more at that time
    • do not give rise to any costs covered by paragraph  820-40(1)(a) of the ITAA 1997.

If a debt interest is on issue for a total of 90 days or more, it will be treated as having been on issue for 90 days or more for all relevant measurement days.

Example 9: Measurement days

An ADI with a standard income year that uses monthly measurement days issues a debt interest that does not give rise to any costs covered by paragraph 820-40(1)(a) on 2 July 2015. On the second and third measurement days – 31 July and 31 August 2015 – the debt interest has been on issue for less than 90 days and would not be included in ADI equity capital. On the third measurement day – 30 September 2015 – the debt interest is still on issue and has been on issue for more than 90 days. The debt interest will therefore be included in the ADI's equity capital on this measurement day and will be treated as having been included in ADI equity on the 2 preceding measurement days.

End of example

For more information, see subsection 995-1(1) of the ITAA 1997.

Adjusted average debt

Broadly, adjusted average debt is the average value of debt capital attributable to an entity's Australian operations that gives rise to debt deductions, with reductions for loans to associate entities and controlled foreign entity debt.

For more information, see:

Adjusted average equity capital

Adjusted average equity capital is the average value of an outward investor ADI's equity capital, other than ADI equity capital attributable to its overseas permanent establishments, less the average value of the controlled foreign entity equity other than controlled foreign entity equity attributable to overseas permanent establishments.

For more information, see subsection 820-300(3) of the ITAA 1997.

Adjusted on-lent amount

The adjusted on-lent amount is one of the 2 amounts that must be calculated to determine the safe harbour debt amount of a financial entity.

For more information, see:

Arm's length capital amount

The arm's length capital amount is a notional amount of equity capital attributable to an ADI's Australian operations determined under the arm's length capital test in Division 820 of the ITAA 1997.

For more information, see:

Assets

The accounting standards are used to determine whether something is an asset. Assets used (or held for use) wholly or principally for private or domestic purposes are specifically excluded.

For more information, see:

Assets threshold test

The asset threshold test is a test used to work out whether an Australian entity with small overseas investments has to apply the broader thin capitalisation rules. To apply the asset threshold test, the entity must work out if its average Australian assets are more than 90% of its total average assets. If so, the broader thin capitalisation rules do not apply, however the rule for debt deduction creation is not precluded.

When calculating the average value of its Australian assets and total assets, the Australian entity must also include the average value of all the Australian assets and total assets of its associates.

Certain Australian entities with small overseas investments (compared with their total investments) are not required to apply the thin capitalisation rules.

Specifically, the broader thin capitalisation rules do not apply to an outward investor that is not also foreign controlled where, in a given income year, the sum of its average Australian assets and the average Australian assets of its Australian assets of its associates represent 90% or more of the sum of its average total assets and the average total assets of its associates.

An Australian entity's average Australian assets are all its assets other than:

  • assets attributable to any of the Australian entity's overseas permanent establishments
  • any asset to the extent it is either controlled foreign entity debt or controlled foreign entity equity
  • any asset that is a debt interest or equity interest held in the Australian entity's associates.

A foreign entity's average Australian assets for the purpose of the assets threshold test are the foreign entity's assets that are all of the following:

  • located in Australian
  • attributable to any of the foreign entity's Australian permanent establishments
  • debt interests and equity interests to the extent they are held in Australian entities that are not attributable to those Australian entities foreign permanent establishments.

A foreign entity's average Australian assets do not include debt interests and equity interests held in any of the foreign entity's associates.

The average total assets for both Australian entities and foreign entities are all assets other than debt interests and equity interests held in the entity's associates.

Note: Average total assets do not include assets that are wholly or principally for private or domestic purposes.

For more information, see section 820-37 of the ITAA 1997.

Associate

Associates are those entities that, by reason of family or business connections, might appropriately be regarded as being associates of a particular entity. The term 'associate' is broader than the term associate entity.

Generally, associates of an entity are any of the following:

  • relatives
  • partners
  • trustees of a trust where the entity or their associate benefits from the trust
  • anyone with a majority voting interest in a company, either alone or with an associate
  • anyone with sufficient influence over a company, either alone or with an associate.

For more information, see section 318 of the ITAA 1936.

Associate entity

Overview

Broadly, entities are associates of one another if they have sufficient influence over each other. Examples include:

  • where an entity holds a 50% associate interest in an associate entity
  • where an entity has substantive control over the associate entity's distribution or financial policies
  • a subsidiary of a company is an associate entity of that company
  • 2 companies that are subsidiaries of the same parent company are associate entities of each other.

A company will also be an associate entity of another company if the first company is accustomed, under an obligation, or reasonably expected to act in accordance with the directions, instructions or wishes of the other company in relation to whether the first company retains or distributes its profits or its financial policies relating to its assets, debt capital or equity.

Examples of associate entities of individuals include close relatives or a partner where the individual sufficiently influences the relative or the other partner in how they conduct their financial affairs.

Details

An associate entity is used to determine whether an entity is subject to the thin capitalisation rules when:

  • working out whether an entity is a controlling entity or is controlled by an entity
  • calculating maximum allowable debt.

The concept of an associate entity is narrower than the concept of associate in section 318 of the ITAA 1936. Broadly, one entity will be an associate entity of another if either of those entities has a sufficient influence over the other.

There are a number of situations in which an entity will be an associate entity (unless subsection 820-905(1A) of the ITAA 1997 applies). Under the most common situation, contained within subsection 820-905(1) of the ITAA 1997, an entity that is not an individual (entity B) will be an associate entity of another entity (entity A) if both of the following apply:

  • entity B is an associate of entity A under section 318 of the ITAA 1936
  • either    
    • entity A holds an associate interest of 50% or more in entity B
    • entity B (or a director, partner, general partner, trustee or member of entity B's committee of management, as relevant) is accustomed, under an obligation, or is reasonably expected to act in accordance with the directions, instructions or wishes of entity A in relation to the distribution or retention of entity B's profits or its financial policies relating to its assets, debt capital or equity capital.

An individual can also be an associate entity of another entity under subsection 820-905(2) of the ITAA 1997. An individual is an associate entity of another entity if both of the following apply:

  • the individual is an associate of the other entity under section 318 of the ITAA 1936
  • the individual is accustomed, under an obligation, or is reasonably expected to act in accordance with the directions, instructions or wishes of that other entity in relation to the individual's financial affairs.

There are 2 additional rules. They are:

  • If an entity (the first entity) is an associate entity of another entity then that other entity is also an associate entity of that first entity – see subsection 820-905(3B) of the ITAA 1997.
  • If an entity (the first entity) is an associate of another entity and a third entity is also an associate of that other , then the first entity is also an associate entity of the third entity – see subsection 820-905(3A) of the ITAA 1997.

However, there are some exclusions are set out in section 820-905(1A) of the ITAA 1997 that preclude the following entities from being associates of one another:

  • a trustee of a complying superannuation entity (other than a self-managed super fund)
  • wholly-owned subsidiary of a complying superannuation entity (other than a self-managed super fund).

There are also some special rules that apply if the entity is a responsible entity of a registered scheme. These rules are described in subsection 820-905(2A) of the ITAA 1997.

A registered scheme is a management investment scheme that is registered under section 601EB of the Corporations Act 2001. The responsible entity will only be an associate entity, in its capacity as responsible entity, of another entity if both of the following apply:

  • the entity, in its capacity as responsible entity, is an associate of that other entity under section 318 of the ITAA 1936
  • either    
    • that other entity holds an associate interest of 50% or more in the registered scheme
    • that other entity holds an associate interest of 20% or more in the registered scheme and the responsible entity (or director, general partner, trustee or member of the responsible entity's committee or management, as relevant) is accustomed, under an obligation, or is reasonably expected to act in accordance with the directions, instructions or wishes of that other entity in relation to the distribution or retention of the schemes profits or the financial policies relating to the scheme's assets, debt capital or equity capital.

These rules only apply to make the responsible entity (in its capacity as responsible entity) and another entity become associate entities where that other entity can sufficiently influence the responsible entity in carrying out its duties.

For more information, see section 820-905 of the ITAA 1997.

Modified definition of associate entity

Modified definitions of ‘associate entity’ apply for specific purposes under Subdivision 820AA of the ITAA 1997 (thin capitalisation rules for general class investors) and applicable to general class investors under Subdivision 820-AA of the ITAA 1997 and in applying aspects of the third-party debt test under Subdivision 820-EAB of the ITAA 1997.   

For further information, see modified definition of associate entity.

Associate entity debt

Broadly, associate entity debt is the debt lent to an associate entity on arm's length terms and conditions.

The concept of associate entity debt is relevant to calculating a financial entity's adjusted average debt and maximum allowable debt. Associate entity debt is an amount calculated by the lending entity in respect of each of its associate entities.

Effective from 1 July 2018, for the purposes of the associate entity debt definition, where an entity is either a trust (other than a public trust) or a partnership, that entity will be an associate entity when another entity holds an associate interest of 10% or more in the trust or partnership.

Specific integrity measures for trusts and partnerships being associate entities for the purpose of the associate entity debt definition were also introduced at this time.

For more information, see:

Certain conditions must be satisfied for an amount to be treated as associate entity debt during a period. Firstly, the lender (or debt interest holder) must be either an outward investing financial entity (non-ADI) or an inward investor (financial) throughout the period. Secondly, the associate entity must be one of the following throughout the period:

  • an outward investing financial entity (non-ADI)
  • an inward investor (financial) that either or both    
    • carries on business in Australia at or through one or more of its Australian permanent establishments
    • holds assets that are attributable to its Australian permanent establishments or other assets that are held for the purposes of producing its Australian assessable income.

Note: For the purposes of determining an entity's associate entity debt, an associate entity that has elected to be treated as an ADI under Subdivision 820-EA is still treated as a non-ADI.

For more information, see subsection 820-430(4) of the ITAA 1997.

The associate entity must also not be either of the following:

  • an exempt entity in the period
  • excepted from the thin capitalisation rules by either the debt deduction threshold or the asset threshold rules in the period.

The asset threshold only applies to entities that are outward investing financial entities – (non-ADI) or (ADI). For example, they are not also inward investing financial entities – (non-ADI) or (ADI).

Also, the associate entity must not be exempt from the thin capitalisation rules under section 820-39 for all or some of the period. Certain special purpose vehicles are exempted under this section.

These requirements ensure that the associate entity receiving the debt funding is itself subject to the thin capitalisation rules so that the debt is tested in at least one entity.

The lender's associate entity debt is the value of the debt interests it holds that satisfy all the following requirements:

  • the debt interests were issued by an associate entity that meets all the above conditions, whether the debt interest was originally issued to the investing entity or another entity, and remain on issue
  • the debt interests give rise to costs that are debt deductions for that associate entity.

If the associate entity is a foreign entity, debt interests issued by it are only included in the lender's associate entity debt to the extent they are attributable to either of the following:

  • assets attributable to the foreign entity's Australian permanent establishments
  • assets held by the foreign entity for the purposes of producing its Australian assessable income.

For more information, see section 820-910 of the ITAA 1997.

Associate entity equity

Broadly, associate entity equity is the equity an investing entity has invested in an associate entity and any debt interests issued by the associate entity to the investing entity that do not and will not give rise to debt deductions at any time. This is measured from the investing entity's perspective.

Effective from 1 July 2018 for the purposes of the associate entity equity definition, where an entity is either a trust (other than a public trust) or a partnership, that entity will be an associate entity when another entity holds an associate interest of 10% or more in the trust or partnership.

Specific integrity measures for trusts and partnerships being associate entities for the purpose of the associate entity equity definition were also introduced at this time.

For more information, see:

Associate entity equity is an amount calculated by an outward investing financial entity (non-ADI) or an inward investor (financial) (i.e. an investing entity) in respect of each of its associate entities.

An investing entity can only have associate entity equity in a foreign associate entity if the foreign entity has either of the following:

  • assets that are attributable to the foreign entity's Australian permanent establishments
  • other assets that are held for the purposes of producing the foreign entity's Australian assessable income.

The investing entity's associate entity equity is the sum of all of the following:

  • the value of equity interests the investing entity holds in its associate entities
  • the value of debt interests held by the investing entity that were issued by each associate entity, whether to the investing entity or someone else, which remain on issue, and    
    • of which no part is cost-free debt capital
    • which do not give rise to any costs covered by paragraph 820-40(1)(a) of the ITAA 1997 at any time
  • the value of the debt interests held by the investing entity that were issued by associate entities, whether to the investing entity or someone else, which remain on issue, and give rise to costs that are    
    • covered by paragraph 820-40(1)(a) of the ITAA 1997
    • not deductible from the associate entity's assessable income in any income year.

If the equity interests or debt interests were issued by a foreign associate entity, the interest is only included in the lender's associate entity equity to the extent it is attributable to either of the following:

  • assets attributable to the foreign entity's Australian permanent establishments
  • other assets held for the purposes of producing the foreign entity's Australian assessable income.

For more information, see section 820-915 of the ITAA 1997.

Associate entity excess amount

This is the proportion of excess borrowing capacity of an associate entity and any premium paid for an investment in an associate entity that can be used to increase the investing entity's (non-ADI) safe harbour debt amount and worldwide gearing debt amount.

To apply the associate entity rules to entities other than individuals, it is necessary to consider the concept of associate interest. This concept differs depending on whether you are dealing with a company, trust or partnership.

For more information, see section 820-920 of the ITAA 1997.

Effective from 1 July 2018 for the purposes of associate entity excess amount definition, where an entity is either a trust (other than a public trust) or a partnership, that entity will be an associate entity when another entity holds an associate interest of 10% or more in the trust or partnership.

Specific integrity measures for trusts and partnerships being associate entities for the purpose of the associate entity excess amount definition were also introduced at this time.

For more information, see:

Associate interest

Associate interest is the percentage of direct control interest an entity has in another. In certain circumstances an entity is deemed to have an associate interest of 100% in another entity.

For more information, see subsections 820-905(4)-(8) of the ITAA 1997.

Associate interest in a company

An associate interest in a company (except a corporate limited partnership) is the direct control interest measured under subsections 350(1) to 350(5) of the ITAA 1936. Broadly, an entity holds an associate interest in a company equal to the greatest of the percentages that the entity holds, or is entitled to acquire, of the following:

  • total paid-up share capital in the company
  • total rights to vote or to participate in any decision making in relation to    
    • the distribution of capital or profits
    • the changing of constituent documents
    • the varying of share capital of the company
  • total rights to distributions or capital or profits of the company on winding-up
  • total rights to distributions of capital or profits of the company other than on winding up.

For these purposes, eligible finance shares (defined in section 327 of the ITAA 1936) held in the company are not counted.

For example, if you hold a 50% voting interest and a 75% income interest in a company, your associate interest in the company is 75%.

For more information, see subsections 820-905(4) and 820-905(5) of the ITAA 1997.

Associate interest in a partnership

An associate interest in a partnership is measured under subsection 820-905(8) of the ITAA 1997. An entity holds an associate interest in a partnership equal to the greatest of the following percentages:

  • in the case of corporate limited partnership – 100% if the entity is a general partner of the partnership
  • in the case of a partnership that is not a corporate limited partnership – the percentage of the control of voting power in the partnership that the entity holds at that time
  • in any other case – the greatest percentage the entity holds or is entitled to acquire at that time of any of the following    
    • the total amount of assets or capital contributed to the partnership
    • the total rights of partners to distributions of capital, assets or profits on the dissolution of the partnership
    • the total rights of partners to distributions of capital, assets or profits otherwise than on the dissolution of the partnership.

For more information, see subsection 820-905(8) of the ITAA 1997.

Associate interest in a trust

An associate interest in a trust is the direct control interest measured under subsections 351(1) and 351(2) of the ITAA 1936. Broadly, an entity holds an associate interest in a trust equal to the greatest of the percentages that the entity holds or is entitled to acquire to either of the following:

  • the share of the trust's income
  • the share of the trust's capital.

For example, if an entity is entitled to 50% of the capital and 75% of the income of the trust, the associate interest in the trust is 75%.

For more information, see subsections 820-905(6) and 820-905(7) of the ITAA 1997.

Attributable safe harbour excess amount

This is the excess borrowing capacity of an associate entity that may be used to increase the investing entity's safe harbour debt amount and worldwide gearing debt amount. This amount forms part of the associate entity excess amount.

In the safe harbour calculations, assets are reduced by the average value of equity invested in associate entities. This prevents the same amount of equity being used by different entities to leverage their assets. If the associate entity receiving the equity has not used all that equity to leverage its own assets, a proportion of its excess borrowing capacity may be attributed to the investing entity. If more than one entity holds equity in the associate entity, the amount of available excess that can be attributed is apportioned according to the proportion of equity held in the associate entity. The amount that can be carried back up is called the 'attributable safe harbour excess amount'. This cannot be a negative amount.

For more information, see subsection 820-920(4) of the ITAA 1997.

Australian controlled foreign entity

This is a foreign entity in which a group of 5 or fewer Australian entities have at least a 50% interest or that is otherwise controlled by Australian entities.

For more information, see:

Australian controller

An Australian controller is an Australian entity that has at least a 10% interest in, or otherwise controls, a controlled foreign entity.

For more information, see:

Australian entity

An Australian entity is any of the following:

An Australian entity does not include a company or individual that would be a resident of both Australia and a foreign country but is taken to be a resident of a foreign country under a double tax agreement.

For more information, see:

Authorised deposit-taking institution (ADI)

This is a body corporate that is an authorised deposit-taking institution (ADI) for the purposes of the Banking Act 1959.

For more information, see subsection 995-1(1) of the ITAA 1997.

Average debt

Average debt is the average value of an entity's debt capital that gives rise to debt deductions. For financial entities (non-ADI), average debt also includes the average value of any cost-free debt capital that the entity has for the relevant year.

If the entity is an outward investor, average debt excludes debt capital attributable to any of its overseas permanent establishments. This amount is used to calculate the proportion of debt deductions disallowed.

For more information, see:

Average equity capital

Average equity capital is the average value of an inward investing entity (ADI)'s equity capital attributable to the ADI's Australian permanent establishments through which it carries on its banking business and loans that the ADI has made available to these Australian permanent establishments which do not give rise to any debt deductions (with a reduction for equity capital allocated to the off-shore banking activities of the permanent establishment).

For more information, see:

Average value

This is the average value of a matter, such as assets or debt capital, over a given period, such as all or part of an income year.

Entities must calculate the average values of items such as their assets, non-debt liabilities, debt capital and equity capital in order to apply the thin capitalisation rules. The rules provide 3 methods for working out average values:

  • the opening and closing balances method – an average of the opening and closing values for the period
  • the 3 measurement days method – an average based on 3 specified days during the period
  • the frequent measurement method – an average using quarterly measurement days. This method also allows for more frequent measurement days to be used, such as daily, weekly or monthly measurement days.

Assets and liabilities must be valued in accordance with the accounting standards, which incorporate the international financial reporting standards. These values should be recorded in the entity's books of account. However, it is permissible to revalue assets for thin capitalisation purposes and not for accounting purposes.

The values of assets and liabilities used by a group when calculating its thin capitalisation position are based on information that would be contained in a set of consolidated accounts prepared in accordance with the accounting standards.

Because the consolidation rules only allow 100% owned entities to consolidate, the consolidated accounts prepared for accounting purposes may not be able to be used, without modification, for thin capitalisation purposes. The accounts are to take into account only those entities that can be grouped under the consolidation rules.

For income years commencing on or after 1 January 2009, calculations made for thin capitalisation purposes, in relation to identifying and valuing an entity's assets, liabilities and equity capital, must be made using the Australian equivalents to International Financial Reporting Standards (AIFRS) with modifications for non-ADI entities as set out in sections 820-682, 820-683 and 820-684 of the ITAA 1997 (the latter two provisions only have effect until the 2019 income year). The modifications applicable to ADIs are set out in sections 820-300 and 820-310 of the ITAA 1997.

For more information, see subdivision 820-G of the ITAA 1997.

QC48160