Treasury Laws Amendment (Making Multinationals Pay Their Fair Share - Integrity and Transparency) Act 2024 (23 of 2024)

Schedule 2   Thin capitalisation

Part 1   Amendments

Income Tax Assessment Act 1997

29   After Subdivision 820-A

Insert:

Subdivision 820-AA - Thin capitalisation rules for general class investors

Guide to Subdivision 820-AA

820-45 What this Subdivision is about

This Subdivision sets out the thin capitalisation rules that apply to general class investors (that is, entities that are not dealt with in rules set out in Subdivisions 820-B, 820-C, 820-D or 820-E). These rules deal with the following matters:

• how all or a part of the debt deductions claimed by the entity may be disallowed under one of three tests (the fixed ratio test, the group ratio test or the third party debt test);

• how the entity can choose to apply which one of these tests applies;

• where the fixed ratio test applies, whether the entity can claim a special deduction in respect of amounts previously disallowed under the fixed ratio test.

Table of sections

Operative provisions

820-46 Thin capitalisation rule for general class investors

820-47 Choices under subsection 820-46(3) or (4)

820-48 Where entity is taken to make third party debt test choice

820-49 Meaning of obligor group etc.

820-50 Amount of debt deduction disallowed

820-51 Meaning of fixed ratio earnings limit and group ratio earnings limit

820-52 Meaning of tax EBITDA

820-53 Meaning of group ratio , GR group , GR group parent and GR group member

820-54 Meaning of GR group net third party interest expense , financial statement net third party interest expense and adjusted net third party interest expense

820-55 Meaning of entity EBITDA and GR group EBITDA

820-56 Special deduction for previously FRT disallowed amounts - fixed ratio test

820-57 Meaning of FRT disallowed amount

820-58 FRT disallowed amount is treated as zero where subsequent choice means fixed ratio test does not apply

820-59 When FRT disallowed amount is treated as zero for companies and trusts

Operative provisions

820-46 Thin capitalisation rule for general class investors

Thin capitalisation rule

(1) This subsection disallows all or part of an entity's *debt deductions for an income year if, for that year:

(a) the entity is a *general class investor (see subsection (2)); and

(b) the entity:

(i) has not made a choice under subsection (3) or (4) (fixed ratio test applies); or

(ii) has made a choice under subsection (3) (group ratio test applies); or

(iii) has made a choice under subsection (4) (third party debt test applies).

Note 1: This Subdivision does not apply if the total debt deductions of that entity and all its associate entities for that year are $2 million or less, see section 820-35.

Note 2: To work out the amount to be disallowed, see section 820-50.

Note 3: A consolidated group or MEC group may be a general class investor to which this Subdivision applies: see Subdivisions 820-FA and 820-FB.

General class investor

(2) The entity is a general class investor for an income year if, and only if:

(a) for a period that is all or part of the income year, the entity is not any of the following:

(i) an *outward investing financial entity (non-ADI);

(ii) an *inward investing financial entity (non-ADI);

(iii) an *outward investing entity (ADI);

(iv) an *inward investing entity (ADI); and

(b) assuming that the entity were a *financial entity for all of the income year, it would be, for the income year, any of the following:

(i) an outward investing financial entity (non-ADI);

(ii) an inward investing financial entity (non-ADI).

(3) An entity that is a *general class investor for an income year may make a choice under this subsection to apply the group ratio test in relation to that income year if:

(a) the entity is a *GR group member for the period corresponding to the income year of a *GR group for the period; and

(b) the *GR group EBITDA for the period of the GR group is greater than zero.

(4) An entity that is a *general class investor for an income year may make a choice under this subsection to apply the third party debt test in relation to that income year.

(5) An entity that is a *general class investor for an income year is taken to have made a choice under subsection (4) in relation to that income year if section 820-48 applies to the entity in relation to that income year.

(6) Subsection (5) applies despite subsection 820-47(1).

820-47 Choices under subsection 820-46(3) or (4)

(1) A choice under subsection 820-46(3) or (4) can only be made in the *approved form.

(2) A choice under subsection 820-46(3) or (4) can only be made:

(a) on or before the earlier of the following days:

(i) the day the entity lodges its *income tax return for the income year;

(ii) the day the entity is required to lodge its income tax return for the income year; or

(b) a later day allowed by the Commissioner.

(3) Subject to subsections (4) and (4A) of this section, a choice under subsection 820-46(3) or (4) cannot be revoked.

(4) An entity that makes a choice under subsection 820-46(3) or (4) (other than a choice that is taken to have been made under subsection 820-46(5)) may revoke the choice if the Commissioner makes a decision to that effect under subsection (6).

(4A) If, under subsection 820-46(5), an entity is taken to have made a choice to apply the third party debt test in relation to an income year:

(a) the entity may not make a choice under subsection 820-46(3) (group ratio test applies) in relation to that income year; and

(b) any choice previously made under subsection 820-46(3) by the entity in relation to that income year is revoked and taken never to have been made.

(5) For the purposes of this Division (other than this section), if a choice is revoked under subsection (4) or (4A) of this section, the entity is taken to have never made the choice.

(6) The Commissioner can decide, in writing, that a specified entity can revoke a specified choice under subsection 820-46(3) or (4) (other than a choice that is taken to have been made under subsection 820-46(5)) in relation to an income year, if the Commissioner is satisfied that all of the following conditions are satisfied:

(a) the entity made the choice;

(c) the entity has applied to the Commissioner, in the *approved form, to revoke the choice before the earlier of the following days:

(i) the day that is 4 years after the day the entity lodged its *income tax return for the income year;

(ii) the day that is 4 years after the day the entity was required to lodge its income tax return for the income year;

(d) it is fair and reasonable, having regard to matters the Commissioner considers relevant, to allow the entity to revoke the choice.

(7) If the Commissioner makes a decision under subsection (6), the Commissioner must give a copy of the decision to the entity as soon as practicable.

820-48 Where entity is taken to make third party debt test choice

(1) For the purposes of subsection 820-46(5), this section applies to an entity (the first entity ) in relation to an income year if:

(a) the first entity is a *member of an *obligor group in relation to a *debt interest; and

(b) the entity that issued the debt interest:

(i) has made a choice under subsection 820-46(4) in relation to that income year (including a choice that is taken to be made under subsection 820-46(5) in relation to a different obligor group); and

(ii) is required to lodge an *income tax return for the income year; and

(c) the first entity:

(i) is an *associate entity of the entity mentioned in paragraph (b) of this subsection; and

(ii) is required to lodge an *income tax return for the income year.

(2) For the purposes of subparagraph (1)(c)(i), in determining whether an entity is an associate entity of another entity:

(aa) disregard the requirement in subsections 820-905(1) and (2A) that the entity is an *associate of the other entity, unless only paragraph 820-905(1)(b) applies; and

(a) treat the references in paragraphs 820-905(1)(a) and 820-905(2A)(a) to "an *associate interest of 50% or more" as instead being a reference to "a *TC control interest of 20% or more"; and

(b) treat subsection 820-860(3) as applying for the purposes of determining whether the entity is an associate entity of the other entity (as a result of paragraph (a) of this subsection); and

(c) treat the purposes mentioned in subparagraphs 820-870(1)(b)(i) and (ii) as including the purposes of determining whether the entity is an associate entity of the other entity (as a result of paragraph (a) of this subsection).

(3) For the purposes of subsection 820-46(5), this section also applies to the entity mentioned in that subsection in relation to an income year if:

(a) the entity has entered into a *cross staple arrangement with one or more other entities; and

(b) one or more of those other entities has made a choice under subsection 820-46(4) in relation to that income year (including a choice that is taken to be made under subsection 820-46(5)).

820-49 Meaning of obligor group etc.

(1) Subsection (2) applies if:

(a) an entity (the borrower ) has issued a *debt interest to another entity (the creditor ); and

(b) the creditor has recourse for payment of the debt to which the debt interest relates to assets of one or more other entities (each of which is an obligor entity ).

(2) Each obligor entity and the borrower is a member of an obligor group in relation to the *debt interest.

(3) For the purposes of paragraph (1)(b), disregard assets that are *membership interests in the borrower.

820-50 Amount of debt deduction disallowed

(1) The amount (the total disallowed amount ) disallowed under subsection 820-46(1) of the *debt deductions of an entity for an income year is:

(a) if the entity has not made a choice under subsection 820-46(3) or (4) in relation to the income year (fixed ratio test applies) - the amount by which the entity's *net debt deductions for the income year exceed the entity's *fixed ratio earnings limit for the income year (see section 820-51); or

(b) if the entity has made a choice under subsection 820-46(3) in relation to the income year (group ratio test applies) - the amount by which the entity's net debt deductions for the income year exceed the entity's *group ratio earnings limit for the income year (see section 820-51); or

(c) if the entity has made a choice under subsection 820-46(4) in relation to the income year (third party debt test applies) - the amount by which the entity's debt deductions for the income year exceed the entity's *third party earnings limit for the income year (see section 820-427A).

Note 1: The disallowed amount also does not form part of the cost base of a CGT asset. See section 110-54.

Note 2: The entity's net debt deductions for the income year can be a negative amount.

(2) The amount by which a particular *debt deduction is disallowed as a result of subsection (1) is worked out as follows:

(a) first, divide the total disallowed amount by the *debt deductions of the entity for the income year;

(b) next, multiply the amount of the particular debt deduction by the result of paragraph (a).

(3) An entity's net debt deductions for an income year is worked out as follows:

(a) first, work out the sum of the entity's *debt deductions (disregarding this Division other than Subdivision 820-EAA) for the income year;

(b) next, work out the sum of each amount included in the entity's assessable income for that year that is:

(i) interest, an amount in the nature of interest, or any other amount that is economically equivalent to interest; or

(ii) any amount directly incurred by another entity in obtaining or maintaining the financial benefits received, or to be received, by the other entity under a *scheme giving rise to a *debt interest; or

(iii) any other expense that is incurred by another entity and that is specified in the regulations made for the purposes of this subparagraph;

(c) next, subtract the result of paragraph (b) from the result of paragraph (a).

(4) To avoid doubt, an entity's net debt deductions for an income year can be a negative amount.

820-51 Meaning of fixed ratio earnings limit and group ratio earnings limit

(1) An entity's fixed ratio earnings limit for an income year is 30% of its *tax EBITDA for the income year.

(2) An entity's group ratio earnings limit for an income year is its *group ratio for the income year multiplied by its *tax EBITDA for the income year.

820-52 Meaning of tax EBITDA

(1) An entity's tax EBITDA for an income year is worked out as follows:

(a) first, work out the entity's taxable income or *tax loss for the income year (disregarding the operation of this Division (other than Subdivision 820-EAA) and treating a tax loss as a negative amount);

(b) next, add the entity's *net debt deductions for the income year;

(c) next, add the sum of the entity's deductions (if any) from its assessable income for the income year that are any of the following:

(i) *general deductions that relate to forestry establishment and preparation costs unless those costs relate to the clearing of native forests;

(ii) deductions under Divisions 40 and 43 (other than deductions for the entire amount of an expense incurred by the entity);

(iii) deductions under section 70-120;

(ca) next, if the entity is an entity to which subsection 820-60(1) applies - add the *excess tax EBITDA amount (if any) worked out under that section for the income year;

(d) next, make adjustments to the result of paragraph (c) or (ca), as the case requires, in accordance with regulations (if any) made for the purposes of this paragraph.

If the result of paragraph (d) is less than zero, treat it as being zero.

Note: The entity's net debt deductions for the income year can be a negative amount.

Tax losses from earlier income years

(1A) In working out the taxable income or *tax loss of a *corporate tax entity for an income year for the purposes of subsection (1), assume that:

(a) the entity chooses to deduct, under subsection 36-17(2) or (3), all of the entity's tax losses for *loss years occurring before the income year; and

(b) subsection 36-17(5) does not apply to that choice.

Franked distributions

(2) For the purposes of this section, disregard Division 207, to the extent that Division results in an amount of, or a *share of, a *franking credit being included in the entity's assessable income for the income year.

Dividends etc.

(3) In working out the taxable income or *tax loss of an entity for the purposes of subsection (1), disregard any *dividend or *non-share dividend paid to the entity by an *associate entity and included in the entity's assessable income under section 44 of the Income Tax Assessment Act 1936.

Trusts other than AMITs

(4) If the entity is a trust other than an *AMIT:

(a) treat the reference in subsection (1) to the entity's taxable income as being a reference to the *net income of the entity; and

(b) treat the reference in subsection (1) to the entity's *net debt deductions as being a reference to the entity's net debt deductions taken into account in working out that net income; and

(c) treat the reference in subsection (1) to the entity's deductions as being a reference to the entity's deductions taken into account in working out that net income; and

(d) treat the references in subsection (1) to the entity's assessable income as being a reference to the entity's assessable income taken into account in working out that net income.

(5) To avoid doubt, for the purposes of references in subsection (4) to net income, do not make the assumption in subsection 102UX(3) of the Income Tax Assessment Act 1936.

Beneficiaries of trusts other than AMITs

(6) In working out the taxable income or *tax loss of an entity for the purposes of subsection (1), if the entity is a beneficiary of a trust other than an *AMIT, and is an *associate entity of the trust:

(a) disregard the operation of the following provisions in relation to the trust:

(i) Subdivision 115-C;

(ii) Division 6 of Part III of the Income Tax Assessment Act 1936; and

(b) disregard distributions from the trust to the entity.

Attribution managed investment trusts

(6A) If the entity is an *AMIT:

(a) treat the reference in subsection (1) to the entity's taxable income as being a reference to the *net income of the entity; and

(b) treat the reference in subsection (1) to the entity's *net debt deductions as being a reference to the entity's net debt deductions taken into account in working out that net income; and

(c) treat the reference in subsection (1) to the entity's deductions as being a reference to the entity's deductions taken into account in working out that net income; and

(d) treat the references in subsection (1) to the entity's assessable income as being a reference to the entity's assessable income taken into account in working out that net income.

Members of AMITs

(6B) In working out the taxable income or *tax loss of an entity for the purposes of subsection (1), if the entity is a member of an *AMIT, and is an *associate entity of the AMIT:

(a) disregard the operation of Division 276 in relation to the AMIT; and

(b) disregard distributions from the AMIT to the entity.

Partnerships

(7) If the entity is a partnership:

(a) treat the reference in subsection (1) to the entity's taxable income as being a reference to the *net income of the entity; and

(b) treat the reference in subsection (1) to the entity's *net debt deductions as being a reference to the entity's net debt deductions taken into account in working out that net income.

(c) treat the reference in subsection (1) to the entity's deductions as being a reference to the entity's deductions taken into account in working out that net income; and

(d) treat the references in subsection (1) to the entity's assessable income as being a reference to the entity's assessable income taken into account in working out that net income.

Partners in partnerships

(8) In working out the taxable income or *tax loss of an entity for the purposes of subsection (1), if the entity is a partner in a partnership, and is an *associate entity of the partnership, disregard the operation of Division 5 of Part III of the Income Tax Assessment Act 1936.

Associate entity test - TC control interest of 10% or more

(9) For the purposes of subsections (3), (6), (6B) and (8), in determining whether an entity is an associate entity of another entity:

(aa) disregard the requirement in subsections 820-905(1) and (2A) that the entity is an *associate of the other entity, unless only paragraph 820-905(1)(b) applies; and

(a) treat the references in paragraphs 820-905(1)(a) and 820-905(2A)(a) to "an *associate interest of 50% or more" as instead being a reference to "a *TC control interest of 10% or more"; and

(b) treat subsection 820-860(3) as applying for the purposes of determining whether the entity is an associate entity of the other entity (as a result of paragraph (a) of this subsection); and

(c) treat the purposes mentioned in subparagraphs 820-870(1)(b)(i) and (ii) as including the purposes of determining whether the entity is an associate entity of the other entity (as a result of paragraph (a) of this subsection).

Notional deductions of R&D entities

(10) In working out the taxable income or *tax loss of an entity for the purposes of subsection (1), if the entity is an *R&D entity that is entitled to a notional deduction for an income year under Division 355 in relation to *R&D activities of the R&D entity, subtract an amount equivalent to the amount of the notional deduction.

820-53 Meaning of group ratio , GR group , GR group parent and GR group member

(1) If an entity is a *GR group member for a period of a *GR group for the period, the entity's group ratio for the income year corresponding to the period is worked out as follows:

(a) first, work out the *GR group net third party interest expense, for that period, of the GR group;

(b) next, work out the *GR group EBITDA for that period of the GR group;

(c) next, divide the result of paragraph (a) by the result of paragraph (b).

If the result of paragraph (b) is zero, the entity's group ratio for the income year is zero.

Note: The entity must keep records in accordance with section 820-985 if the entity works out a group ratio under this section.

(2) A GR group , for a period, is:

(a) if *audited consolidated financial statements for the period have been prepared for a worldwide parent entity (as described in subsection 820-935(6)) - the group comprised of all of the following:

(i) the worldwide parent entity;

(ii) each other entity that is fully consolidated on a line-by-line basis in those audited consolidated financial statements; or

(b) if paragraph (a) does not apply, and *global financial statements have been prepared for the period for a *global parent entity - the group comprised of all of the following:

(i) the global parent entity;

(ii) each other entity that is fully consolidated on a line-by-line basis in those global financial statements.

(3) If paragraph (2)(a) applies:

(a) the GR group parent for the period of the *GR group is the worldwide parent entity mentioned in that paragraph; and

(b) each of the entities mentioned in that paragraph is a GR group member for the period of the *GR group.

(4) If paragraph (2)(b) applies:

(a) the GR group parent for the period of the *GR group is the *global parent entity mentioned in that paragraph; and

(b) each of the entities mentioned in that paragraph is a GR group member for the period of the *GR group.

820-54 Meaning of GR group net third party interest expense , financial statement net third party interest expense and adjusted net third party interest expense

(1) The GR group net third party interest expense , for a period, of a *GR group for the period, is the amount that would be the group's *financial statement net third party interest expense for the period, if:

(a) where paragraph 820-53(2)(a) applies - the *audited consolidated financial statements for the period for the *GR group parent for the period of the group were prepared on the basis that the following were treated as interest:

(i) an amount in the nature of interest;

(ii) any other amount that is economically equivalent to interest; or

(b) where paragraph 820-53(2)(b) applies - the *global financial statements for the period for the GR group parent for the period of the group were prepared on the basis that the following were treated as interest:

(i) an amount in the nature of interest;

(ii) any other amount that is economically equivalent to interest.

(2) The financial statement net third party interest expense , for a period, of a *GR group for the period, is:

(a) the amount of the *GR group's net third party interest expense for the period, as disclosed in the following statements:

(i) if paragraph 820-53(2)(a) applies - the *audited consolidated financial statements for the *GR group parent for the period for the GR group;

(ii) if paragraph 820-53(2)(b) applies - the *global financial statements for the GR group parent for the period for the GR group;

reduced by the amount of each payment (if any) covered by subsection (3), to the extent that it was a factor in working out that net third party interest expense; or

(b) if those statements do not disclose that net third party interest expense - the amount worked out as follows:

(i) first, identify the amount of the group's third party interest expenses for the period disclosed in those statements;

(ii) next, reduce the result of subparagraph (i) by the amount of each payment (if any) covered by subsection (3), to the extent that it was a factor in working out those third party interest expenses;

(iii) next, reduce the result of subparagraph (ii) by the amount of the group's third party interest income for the period disclosed in those statements;

(iv) next, increase the result of subparagraph (iii) by the amount of each payment (if any) covered by subsection (3), to the extent that it was a factor in working out that third party interest income.

(3) For the purposes of subsection (2), this subsection covers a payment if:

(a) the payment is made by an entity to an *associate entity of the entity; and

(b) either:

(i) the entity is a *GR group member for the period of the *GR group and the associate entity is not such a GR group member; or

(ii) the entity is not a GR group member for the period of the GR group and the associate entity is such a GR group member.

(4) The adjusted net third party interest expense , for a period, of an entity or a *GR group is:

(a) for an entity - the amount that would be the entity's net interest expense for the period if the following payments were disregarded:

(i) a payment that is made by the entity to an *associate entity of the entity;

(ii) a payment that is made by an associate entity of the entity to the entity; or

(b) for a GR group - the amount that would be the GR group's net interest expense for the period if the following payments were disregarded:

(i) a payment that is made by a *GR group member of the GR group to an associate entity of any GR group member of the GR group;

(ii) a payment that is made by an associate entity of a GR group member of the GR group to any GR group member of the GR group.

(5) For the purposes of subsections (3) and (4), in determining whether an entity is an associate entity of another entity:

(aa) disregard the requirement in subsections 820-905(1) and (2A) that the entity is an *associate of the other entity, unless only paragraph 820-905(1)(b) applies; and

(a) treat the references in paragraphs 820-905(1)(a) and 820-905(2A)(a) to "an *associate interest of 50% or more" as instead being a reference to "a *TC control interest of 20% or more"; and

(b) treat subsection 820-860(3) as applying for the purposes of determining whether the entity is an associate entity of the other entity (as a result of paragraph (a) of this subsection); and

(c) treat the purposes mentioned in subparagraphs 820-870(1)(b)(i) and (ii) as including the purposes of determining whether the entity is an associate entity of the other entity (as a result of paragraph (a) of this subsection).

820-55 Meaning of entity EBITDA and GR group EBITDA

(1) The entity EBITDA of an entity, for a period, is the sum of the following for the entity for the period:

(a) the entity's net profit (disregarding tax expenses);

(b) the entity's *adjusted net third party interest expense;

(c) the entity's depreciation and amortisation expenses.

(2) The GR group EBITDA , for a period, of a *GR group for the period, is the sum of the following:

(a) the GR group's net profit (disregarding tax expenses);

(b) the GR group's *adjusted net third party interest expense;

(c) the GR group's depreciation and amortisation expenses;

as disclosed in:

(d) if paragraph 820-53(2)(a) applies - the *audited consolidated financial statements for the *GR group parent for the period for the GR group; or

(e) if paragraph 820-53(2)(b) applies - the *global financial statements for the GR group parent for the period for the GR group.

(3) For the purposes of subsection (2), in working out the *GR group's *GR group EBITDA for the period, if a *GR group member for the period of the GR group has an *entity EBITDA for the period of less than zero, disregard that entity EBITDA.

(4) To avoid doubt, for the purposes of this section, an entity's, or a *GR group's, net profit (disregarding tax expenses) can be a negative amount.

820-56 Special deduction for previously FRT disallowed amounts - fixed ratio test

(1) An entity can deduct the amount worked out under subsection (2) from its assessable income for the income year if:

(a) the entity has not made a choice under subsection 820-46(3) or (4) in relation to the income year (fixed ratio test applies); and

(b) the entity's *fixed ratio earnings limit for the income year exceeds the sum of the entity's *net debt deductions for the income year.

Note: The entity's net debt deductions for the income year can be a negative amount.

(2) Work out the amount of the deduction as follows:

(a) first, work out the amount of the excess mentioned in paragraph (1)(b);

(b) next, apply against that excess each of the entity's *FRT disallowed amounts for the previous 15 income years (to the extent that they have not already been applied under this paragraph in respect of any of those previous income years).

The amount of the deduction is the total amount applied under paragraph (b).

(3) For the purposes of paragraph (2)(b):

(a) apply *FRT disallowed amounts in sequence, where a FRT disallowed amount for an earlier income year is applied before a FRT disallowed amount from a later income year; and

(b) apply FRT disallowed amounts up to, but not beyond, the excess mentioned in paragraph (1)(b).

Note: As a result of paragraph (3)(b), part of a FRT disallowed amount may be applied against the excess mentioned in paragraph (1)(b).

820-57 Meaning of FRT disallowed amount

An entity has a fixed ratio test disallowed amount (or FRT disallowed amount ) for an income year equal to:

(a) if *debt deductions of the entity for the income year are disallowed under subsection 820-46(1) and the amount disallowed is worked out in accordance with paragraph 820-50(1)(a) (fixed ratio test applies) - the amount disallowed; or

(b) otherwise - zero.

820-58 FRT disallowed amount is treated as zero where subsequent choice means fixed ratio test does not apply

(1) Subsection (2) applies if:

(a) an entity has not made a choice under subsection 820-46(3) or (4) in relation to an income year; and

(b) the entity makes a choice under subsection 820-46(3) or (4) in relation to a subsequent income year.

(2) Despite section 820-57, for the purpose of applying section 820-56 in respect of that subsequent income year and later income years, treat the entity as having a *FRT disallowed amount of zero for every income year before that subsequent income year.

820-59 When FRT disallowed amount is treated as zero for companies and trusts

(1) This section applies if an entity is a company or a trust.

(2) This section applies for the purposes of applying a *FRT disallowed amount of the entity for an income year (the disallowance year ) under paragraph 820-56(2)(b), in order to work out the amount of a deduction from its assessable income for another income year (the deduction year ) under subsection 820-56(1).

(3) Despite section 820-57, treat the *FRT disallowed amount for the disallowance year as being zero unless:

(a) if the entity is a company - subsection (4) applies; or

(b) if the entity is a trust - subsection (5) applies.

Rules for companies

(4) This subsection applies if, assuming that:

(a) the *FRT disallowed amount were a *tax loss; and

(b) the disallowance year were the *loss year; and

(c) the following provisions were disregarded:

(i) subsection 165-115B(3);

(ii) subsection 165-115BA(5);

(iii) section 415-35;

Divisions 165, 166 and 167 would not prevent the company from deducting the entire amount of that tax loss in the deduction year.

Rules for trusts

(5) This subsection applies if, assuming that:

(a) the *FRT disallowed amount were a tax loss (within the meaning of Schedule 2F to the Income Tax Assessment Act 1936); and

(b) the disallowance year were a loss year (within the meaning of that Schedule);

that Schedule would not prevent the entity from deducting the entire amount of that tax loss in the deduction year.

820-60 Excess tax EBITDA amount

Scope

(1) This section applies to an entity (the controlling entity ) if:

(a) the controlling entity is, for a period that is all or part of an income year, one of the following entities:

(i) a company that is an *Australian entity;

(ii) a unit trust that is a *resident trust for CGT purposes;

(iii) a *managed investment trust;

(iv) a partnership that is an Australian entity; and

(b) the controlling entity is a *general class investor for all or part of the income year; and

(c) the controlling entity has not made a choice under subsection 820-46(3) or (4) in relation to the income year; and

(d) one or more other entities (each of which is a controlled entity ) satisfy the conditions in subsection (2) of this section in relation to the controlling entity for the income year.

(2) An entity (the test entity ) satisfies the conditions in this subsection in relation to the controlling entity for an income year if:

(a) the controlling entity has a *TC direct control interest of 50% or more in the test entity at any time during the income year; and

(b) the test entity is, for a period that is all or part of the income year, one of the following entities:

(i) a company that is an *Australian entity;

(ii) a unit trust that is a *resident trust for CGT purposes;

(iii) a *managed investment trust;

(iv) a partnership that is an Australian entity; and

(c) the test entity is a *general class investor for all or part of the income year; and

(d) the test entity has not made a choice under subsection 820-46(3) or (4) in relation to the income year.

Excess tax EBITDA amount

(3) The controlling entity's excess tax EBITDA amount for the income year is the amount worked out using the following method statement.

Method statement

Step 1.For each controlled entity, work out the amount (if any) by which the *fixed ratio earnings limit of the controlled entity for the income year exceeds the sum of the following:

(a) the controlled entity's *net debt deductions for the income year (for the purposes of this paragraph, treat a negative amount of net debt deductions as nil);

(b) the total of the controlled entity's *FRT disallowed amounts for the 15 income years ending immediately before the income year (to the extent those amounts have not been applied under section 820-56).

Step 2. For each controlled entity:

(a) work out the controlling entity's *TC direct control interest for each day in the income year; and

(b) for each day on which the amount was 50% or greater, add the amounts; and

(c) divide the result of paragraph (b) by the number of days in the income year during which the controlled entity was in existence. Express the result as a percentage.

Step 3. For each controlled entity, multiply the result of step 1 by the percentage worked out under step 2. If the amount worked out under step 1 for a controlled entity is nil, the result for that controlled entity under this step will be nil.

Step 4. Add up the amounts worked out under step 3.

Step 5. Divide the result of step 4 by 0.3. The result of this step is the excess tax EBITDA amount .

Modification of TC direct control interest - companies

(4) For the purposes of this section, in working out whether the controlling entity holds a *TC direct control interest in a company, apply subsection 820-855(2) as if it instead included the modifications of Part X of the Income Tax Assessment Act 1936 set out in the following table.

Modification of TC direct control interest - trusts

(5) For the purposes of this section, in working out whether the controlling entity holds a *TC direct control interest in a trust, apply subsection 820-860(2) as if it also included the modifications of Part X of the Income Tax Assessment Act 1936 set out in the following table.

Modification of TC direct control interest - partnerships

(6) For the purposes of this section, in working out whether the controlling entity holds a *TC direct control interest in a partnership, apply section 820-865 as if:

(a) the reference to "greatest" were a reference to "least"; and

(b) paragraph 820-865(b) were omitted.

Modified meaning of Australian entity

(7) For the purposes of this section, in determining whether an entity is an *Australian entity (including for the purposes of determining whether another entity is a *foreign entity) at a particular time:

(a) for the purposes of paragraph 336(a) of the Income Tax Assessment Act 1936, treat a partnership as being an Australian entity if, at that time, a *direct participation interest of 50% or more is held in the partnership by one or more of the following:

(i) an Australian resident;

(ii) an *Australian trust; and

(b) disregard section 337 of that Act.