Income Tax Assessment Act 1997

CHAPTER 4 - INTERNATIONAL ASPECTS OF INCOME TAX  

PART 4-5 - GENERAL  

Division 820 - Thin capitalisation rules  

Subdivision 820-D - Thin capitalisation rules for outward investing entities (ADI)  

Operative provisions

SECTION 820-315   Arm ' s length capital amount  

820-315(1)    
The arm ' s length capital amount is a notional amount that, having regard to:

(a) the factual assumptions set out in subsection (2); and

(b) the relevant factors mentioned in subsection (3);

would represent the minimum amount of *equity capital that the entity would reasonably be expected to have in carrying on the Australian business mentioned in subsection (2) throughout the income year if, throughout that year:

(c) the part of the entity carrying on that business had operated as if it were a separate entity; and

(d) that separate entity had been dealing at *arm ' s length with:

(i) the other part of the entity; and

(ii) all the *Australian controlled foreign entities of which the entity is an *Australian controller.

Note:

The entity must keep records in accordance with section 820-980 if the entity works out an amount under this section.

Factual assumptions

820-315(2)    
Irrespective of what actually happened during that year, the following assumptions must be made in working out that minimum amount:

(a) the entity ' s commercial activities in connection with Australia (the Australian business ) during that year do not include:

(i) any *business carried on by the entity at or through its *overseas permanent establishments; or

(ii) the holding of any *controlled foreign entity equity;

(b) the entity had carried on the Australian business that it actually carried on during that year;

(c) the nature of the entity ' s assets and liabilities (to the extent that they are attributable to the Australian business) had been as they were during that year;

(d) except as mentioned in subsection (1), the entity had carried on the Australian business in the same circumstances as what actually existed during that year.

Relevant factors

820-315(3)    
On the basis of the factual assumptions set out in subsection (2), the following factors must be taken into account in determining that minimum amount:

(a) the functions performed, the assets used, and the risks assumed, throughout that year, by:

(i) the entity; and

(ii) the entity in relation to the Australian business;

(b) the credit rating of the entity throughout that year, including the effect of that credit rating on all of the following:

(i) the entity ' s ability to borrow in relation to the Australian business;

(ii) the interest rate at which the entity borrowed in relation to that business;

(iii) the entity ' s gross profit margin in relation to that business;

(c) the capital ratios of the following throughout that year:

(i) the entity;

(ii) the entity in relation to the Australian business;

(iii) each of the entity ' s *associate entities that engage in commercial activities similar to the Australian business;

(d) the purposes for which *schemes for *debt capital and for *equity capital had been actually entered into, throughout that year, by:

(i) the entity; and

(ii) the entity in relation to the Australian business;

(e) the profit (within the meaning of the *accounting standards), and the return on capital, whether during that year or at any other time, of:

(i) the entity; and

(ii) the entity in relation to the Australian business;

(f) the commercial practices adopted by independent parties dealing with each other at *arm ' s length in the industry in which the entity carries on the Australian business throughout that year (whether in Australia or in comparable markets elsewhere);

(g) the way in which the entity financed its business (other than the Australian business) throughout that year;

(h) the general state of the Australian economy throughout that year;

(i) any other factors which are specified in the regulations made for the purposes of this section.

Commissioner ' s power

820-315(4)    
If the Commissioner considers an amount worked out by the entity under this section does not appropriately take into account the factual assumptions and the relevant factors, the Commissioner may substitute another amount that the Commissioner considers better reflects those assumptions and factors.