Guide A: Guide to thin capitalisation

Associate entity debt

The concept of associate entity debt is relevant to calculating a non-ADI entity's adjusted average debt and maximum allowable debt. Associate entity debt is an amount calculated by the lending entity in respect of each of its associate entities.

Certain conditions must be satisfied for an amount to be treated as associate entity debt during a period. Firstly, the lender (or debt interest holder) must be either a non-ADI outward investor or a non-ADI inward investing entity throughout the period. Secondly, the associate entity must be one of the following throughout the period:

• a non-ADI outward investor
• a non-ADI inward investment vehicle
• a non-ADI inward investor that either or both
• carries on business in Australia at or through one or more of its Australian permanent establishments
• holds assets that are attributable to its Australian permanent establishments or other assets that are held for the purposes of producing its Australian assessable income.

For the purposes of determining an entity's associate entity debt, an associate entity that has elected to be treated as an ADI under Subdivision 820-EA, is still treated as a non-ADI. Refer to subsection 820-430(4) for more information.

The associate entity must also not be either of the following:

• an exempt entity in the period
• excepted from the thin capitalisation rules by either the debt deduction threshold or the asset threshold rules in the period.

The asset threshold only applies to entities that are outward investing entities - non-ADI or ADI. For example, they are not also inward investing entities - non-ADI or ADI. Also, the associate entity must not be exempt from the thin capitalisation rules under section 820-39 for all or some of the period. Certain special purpose vehicles are exempted under this section.

These requirements ensure that the associate entity receiving the debt funding is itself subject to the thin capitalisation rules so that the debt is tested in at least one entity.

The lender's associate entity debt is the value of the debt interests it holds that satisfy all the following requirements:

• the debt interests were issued by an associate entity that meets all the above conditions, whether the debt interest was originally issued to the investing entity or another entity, and remain on issue
• the debt interests give rise to costs that are debt deductions for that associate entity
• the amount of the debt deductions incurred is included in the lender's assessable income - this requirement does not apply to amounts mentioned in paragraph 820-40(2)(c) as these costs are ordinarily payable to an entity other than the lender
• the terms and conditions of the debt interest are arm's length.

If the associate entity is a foreign entity, debt interests issued by it are only included in the lender's associate entity debt to the extent they are attributable to either of the following:

• assets attributable to the foreign entity's Australian permanent establishments
• assets held by the foreign entity for the purposes of producing its Australian assessable income.

For a more detailed definition of 'associate entity debt', refer to section 820-910.

Sections within 02 Thin capitalisation concepts

• ADI equity capital
• Associate entities
• Associate entity debt
• Associate entity equity
• Associate interests
• Borrowed securities amount
• Controlled foreign entity debt
• Controlled foreign entity equity
• Cost-free debt capital
• Debt deductions
• Debt interest
• Equity capital
• Equity interest
• Excluded equity interest
• Non-debt liabilities
• On-lent amount
• Zero-capital amount