Modified definitions of ‘associate entity’ apply for specific purposes under Subdivision 820-AA of the ITAA 1997 (thin capitalisation rules for general class investors) and for the purposes of applying aspects of the third-party debt test under Subdivision 820-EAB of the ITAA 1997.
The standard definition of associate entity for thin capitalisation purposes is set out in section 820-905 of the ITAA 1997 and is covered in Terms we use. The modifications to this standard definition are set out below.
Fixed ratio test
When a general class investor is calculating its tax EBITDA, it is required to disregard certain amounts paid or distributed to it from associate entities. For these purposes, in determining whether an entity is an associate entity of another entity, the following modifications apply:
- The requirement in subsections 820-905(1) and (2A) of the ITAA 1997 that the entity is an associate of the other entity (under section 318 of the ITAA 1936) is disregarded, unless only paragraph 820-905(1)(b) of the ITAA 1997 applies.
- The references in paragraphs 820-905(1)(a) and 820-905(2A)(a) of the ITAA 1997 to “an associate interest of 50% or more” are treated as instead being a reference to “a TC control interest of 10% or more”. 'TC control interest' is defined in section 820-815 of the ITAA 1997.
- Subsection 820-860(3) of the ITAA 1997 is treated as applying for the purposes of determining whether the entity is an associate entity of the other entity.
- The purposes mentioned in subparagraphs 820-870(1)(b)(i) and (ii) of the ITAA 1997 are treated as including the purposes of determining whether the entity is an associate entity of the other entity.
Group ratio test
In determining whether an entity is an associate entity of another entity for the purposes of the group ratio test, the same modifications as outlined above in relation to the fixed ratio test apply, except that the references in paragraphs 820-905(1)(a) and 820-905(2A)(a) of the ITAA 1997 to “an associate interest of 50% or more” are treated as instead being a reference to “a TC control interest of 20% or more”. Refer to subsection 820-54(5) of the ITAA 1997 for further information.
Third party debt concepts
For the purposes of Subdivision 820-EAB of the ITAA 1997 (Third party debt concepts), in determining whether an entity is an associate entity of another entity the same modifications as outlined above in relation to the fixed ratio test apply, except that the references in paragraphs 820-905(1)(a) and 820-905(2A)(a) of the ITAA 1997 to “an associate interest of 50% or more” are treated as instead being:
- for the purposes of section 820-427A(5)(b) of the ITAA 1997, which concerns recourse against foreign associate entities – “a TC control interest of 50% or more”; and
- for any other purposes of any other provision in Subdivision 820-EAB of the ITAA 1997 – “a TC control interest of 20% or more”.
Further, for the purposes of Subdivision 820-EAB of the ITAA 1997:
- an entity (the first entity) that has entered into a cross-staple arrangement with another entity is treated as an associate entity of that other entity
- if that other entity is itself an associate entity of a conduit financer — treat the first entity as an associate entity of the conduit financer.
Refer to section 820-427D of the ITAA 1997 for further information.
Deemed choice to use the third party debt test
In applying section 820-48 of the ITAA 1997 to determine whether an entity is deemed to have made a choice to apply the third party debt test the same modifications as outlined above in relation to the fixed ratio test apply, except that the references in paragraphs 820-905(1)(a) and 820-905(2A)(a) of the ITAA 1997 to “an associate interest of 50% or more” are treated as instead being a reference to “a TC control interest of 20% or more”.
Note: An entity is also deemed to have made a choice to apply the third party debt test in relation to an income year if the entity has entered into a cross staple arrangement with one or more other entities and one or more of those entities have made a choice to apply the third party debt test in relation to that income year.
|
Relevant provisions |
TC control interest threshold |
|---|---|
|
Fixed ratio test – Calculation of tax EBITDA |
10% or more Refer to fixed ratio test. |
|
Group ratio test |
20% or more Refer to group ratio test. |
|
Third party debt concepts – Credit support rights covered by paragraph 820-427A(5)(b) |
50% or more Refer to third party debt test. |
|
Third party debt concepts – All other purposes |
20% or more Refer to third party debt test. |
|
Deemed choice to use third party debt test |
20% or more |