Guide A: Guide to thin capitalisation

When can an entity that has made a choice use the non-ADI rules?

Once an election has been made, the only circumstances in which the entity can revert back to using the non-ADI rules are where either of the following applies:

• it no longer meets one of the conditions when tested at the end of the third year
• we approve a revocation of the choice.

The entity must test itself that it satisfies one of the conditions explained above every three years. However, if the entity doesn't satisfy these conditions, the choice to apply the ADI rules is not automatically revoked during the intervening three years. It is only if the entity does not meet these conditions at the end of the third income year after the choice is made (or after the last time the entity was required to test) that the choice is revoked - for example, the entity only reverts back to using the non-ADI rules for the next financial year.

Legislative reference: subsections 820-430(6) and (7).

The only other situation in which the choice can be revoked is with written approval from us. We can only approve a revocation if we are satisfied that the entity's circumstances have changed significantly since the entity made the choice. If we approve a revocation, the choice no longer applies from the date on which the revocation is approved or, if we specify an earlier date, from that earlier date.

Legislative reference: section 820-440.

If the choice is revoked, either because the entity fails the conditions at the end of the third year or we approve a revocation, the entity can never again choose to apply the ADI rules.

Legislative reference: subsection 820-430(5).

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?