A financial entity is an entity other than an ADI that is any of the following:
- a registered corporation under the Financial Sector (Collection of Data) Act 2001 that carries on a business of providing finance (but not to or on behalf of its associates) and derives all or substantially all its profits from that business
- a financial services licensee under the Corporations Act 2001 (or an entity that is exempt from the requirement to hold an Australian financial services license for relevant dealings) that carries on a business of dealing in securities or derivatives (but not with or on behalf of its associates)
- a securitisation vehicle.
Examples of financial entities include finance companies and securities dealers.
Choice of tests
For income years commencing on or after 1 July 2023, eligible financial entities may:
- utilise the safe harbour or worldwide gearing tests, or
- choose to apply the third party debt test.
The rules for financial entities recognise that these entities are primarily engaged in lending as a business and have different requirements for debt funding. For example, for financial entities, the 1.5:1 safe harbour ratio applies to their non-lending business while their lending and certain other financial businesses are allowed higher gearing levels.
The safe harbour debt limit for financial entities (non-ADI) is 15:1 on a debt-equity basis.
Certain financial entities can elect to apply the ADI rules. For more information on this election, see Electing to use the ADI rules.