Guide A: Guide to thin capitalisation

Interaction with associate entity debt and associate entity equity rules

For a holder of a debt interest to hold associate entity debt, the issuer must be a non-ADI entity - see section 2 and explanation of 'associate entity debt'. For the purposes of determining whether a debt interest is associate entity debt, the choice made by the borrowing financial entity is disregarded. That is, the debt interest will still be treated as associate entity debt even though the borrowing financial entity has elected to apply the ADI rules to itself.

Legislative reference: subsection 820-430(4).

Similarly, an equity investment in a financial entity electing to apply the ADI rules that is an associate entity of a non-ADI investing entity, will still be associate entity equity providing it meets the relevant conditions - see section 2 and the explanation of associate entity equity. However, because the financial entity has elected to apply the ADI rules, the investing entity will not be able to utilise the associate entity excess provisions to increase its safe harbour debt amount or worldwide gearing debt amount.

Sections within 07 Election to use the ADI rules

• Overview
• How is the election made?
• What ADI rules apply?
• Interaction with associate entity debt and associate entity equity rules
• Interaction with rule about consolidated groups and MEC groups
• When can an entity that has made a choice use the non-ADI rules?