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  • Thin capitalisation and the debt and equity tests

    The debt test is also used to identify which financing arrangements constitute debt for thin capitalisation purposes. Amounts outstanding on debt interests issued by an entity that are still on issue will constitute 'debt capital' under the thin capitalisation rules. Broadly, if the thin capitalisation rules apply, an entity is required to calculate its debt capital and compare it to its maximum allowable debt. If the entity's debt capital is more than its maximum allowable debt the entity's debt deductions may be denied to that extent. Therefore, it is important for thin capitalisation purposes to identify whether an interest is a debt interest.

    Further, it is also necessary for thin capitalisation purposes to identify whether an interest which an entity holds in another entity is an equity interest. In addition to the equity interest rules discussed above, special rules are included in the thin capitalisation law which determine whether an interest is an equity interest in a partnership or trust.

      Last modified: 16 Apr 2018QC 36047