Income Tax Assessment Act 1997
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Hide history noteSECTION 820-185 Thin capitalisation rule for inward investing financial entities (non-ADI)
Thin capitalisation rule
820-185(1A)
Subsection (1) applies if: (a) an entity is an * inward investing financial entity (non-ADI) (see subsection (2) ) for all of an income year, but is not also an * outward investing financial entity (non-ADI) (see section 820-85 ) for all or any part of that year; and (b) either:
(i) the entity has made a choice under subsection (2C) in relation to the income year; or
(ii) otherwise - the entity ' s * adjusted average debt (see subsection (3) ) for the income year exceeds its * maximum allowable debt (see section 820-190 ) for the income year.
Note:
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 .
820-185(1)
This subsection disallows: (a) if paragraph (1A)(b)(i) applies - all or part of the entity ' s * debt deductions for the income year; or (b) if paragraph (1A)(b)(ii) applies - all or a part of each debt deduction of the entity for the income year.
Note 1:
To work out the amount to be disallowed, see section 820-220 .
Note 2:
For the rules that apply to an entity that is an outward investing financial entity (non-ADI) as well as an inward investing financial entity (non-ADI), see Subdivision 820-B .
Note 3:
For the rules that apply to an entity that is an inward investing financial entity (non-ADI) for only a part of an income year, see section 820-225 in conjunction with subsection (2) of this section.
Note 4:
To calculate an average value for the purposes of this Division, see Subdivision 820-G .
Note 5:
A consolidated group or MEC group may be an inward investing financial entity (non-ADI) to which this Subdivision applies: see Subdivisions 820-FA and 820-FB .
Inward investing financial entity (non-ADI)
820-185(2)
The entity is an inward investing financial entity (non-ADI) for a period that is all or a part of an income year if, and only if, it is: (b) an * inward investment vehicle (financial) for that period (as set out in item 1 of the following table); or (d) an * inward investor (financial) for that period (as set out in item 2 of that table).
| Inward investing financial entity (non-ADI) | |||
| Item | If the entity is a: | and the entity: | the entity is an: |
| 1 | *foreign controlled Australian entity throughout a period that is all or a part of an income year | is a *financial entity throughout that period | inward investment vehicle (financial) for that period |
| 2 | *foreign entity throughout a period that is all or a part of an income year | is a financial entity throughout that period | inward investor (financial) for that period |
Note 1:
To determine whether an entity is a foreign controlled Australian entity, see Subdivision 820-H .
Note 2:
An entity covered by item 2 of the table may be required to keep certain records, see Subdivision 820-L .
820-185(2A)
However, the entity is not an inward investing financial entity (non-ADI) for a period that is all or a part of an income year if it is a * general class investor for that year.
820-185(2B)
Subsection (2A) does not apply for the purposes of subsection 820-46(2) (definition of general class investor ).
820-185(2C)
An entity that is an * inward investing financial entity (non-ADI) for a period that is all or part of an income year may make a choice under this subsection to apply the third party debt test in relation to that income year.
820-185(2D)
Section 820-47 applies in relation to a choice under subsection (2C) in the same way that it applies in relation to a choice under subsection 820-46(3) or (4) .
Adjusted average debt
820-185(3)
The entity ' s adjusted average debt for an income year is the result of applying the method statement in this subsection. Method statement
Step 1.
Work out the average value, for that year (the relevant year ), of all the *debt capital of the entity that gives rise to *debt deductions of the entity for that or any other income year.
Step 2.
Reduce the result of step 1 by the average value, for the relevant year, of:
Step 3.
If the entity is a *financial entity throughout the relevant year, add to the result of step 2 the average value, for the relevant year, of the entity ' s *borrowed securities amount.
Step 4.
Add to the result of step 3 the average value, for the relevant year, of the *cost-free debt capital of the entity. The result of this step is the adjusted average debt .
Note:
To calculate an average value for the purposes of this Division, see Subdivision 820-G .
820-185(4)
The entity ' s *adjusted average debt does not exceed its *maximum allowable debt if the adjusted average debt is nil or a negative amount.
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