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 predominantly for the purposes of providing finance directly or indirectly to, or on behalf of, the entity's 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.