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Procedure of choices

A ‘general class investor’ must determine which test to apply.

Published 23 July 2024

Under the thin capitalisation rules, general class investors are subject to the fixed ratio test unless they make a choice to use either the group ratio test or the third party debt test for an income year. In some cases, certain general class investors are deemed to have made a choice to use the third party debt test by subsection 820-46(5) of the ITAA 1997.

A choice for an income year to use either the group ratio test or the third party debt test must be made in the approved form by the following dates:

  • on or before the earlier of the following days
    • the day the entity lodges its income tax return for the income year
    • the day the entity is required to lodge its income tax return for the income year
  • a later day allowed by the Commissioner.

An entity that has made a choice (other than a choice that is deemed to have made under subsection 820-46(5) of the ITAA 1997) to use the group ratio test or third party debt test may apply to the Commissioner, in the approved form, to revoke the choice. An entity must apply to revoke a choice in relation to an income year within 4 years after they lodge their income tax return for the income year (or are required to lodge their income tax return for the income year if that date is earlier).

In deciding whether to revoke a general class investor’s choice, the Commissioner must consider whether it is fair and reasonable, having regard to matters the Commissioner considers relevant.

If an entity revokes its choice, then the entity is taken to have never made the choice. This has the effect that deemed choices previously taken to have been made under subsection 820-46(5) of the ITAA 1997 are taken to have never been made.

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