• # Step 4: Calculate the debt deductions disallowed

The ADI's minimum capital amount is the lesser of the:

• safe harbour capital amount from step 2
• arm's length capital amount from step 3.

You do not necessarily have to calculate both amounts. If you do not want to calculate an arm's length capital amount you can use the safe harbour capital amount as the minimum capital amount.

If the ADI's average equity capital is less than its minimum capital amount, a proportion of its debt deductions cannot be deducted. Table 56: ADI inward investing entity's step 4 and Worksheet 48: ADI inward investing entity's step 4 work out the proportion disallowed.

Table 56: ADI inward investing entity's step 4

Steps

Step 4.1: Calculate the amount by which the ADI's average equity capital is less than its minimum capital amount; that is, the capital shortfall

Insert the result at D on the Worksheet 48: ADI inward investing entity's step 4

The proportion of debt deductions disallowed depends on the amount by which the ADI's average equity capital (from step 1) is less than its minimum capital amount

Step 4.2: Calculate the ADI's average debt

Insert this amount at E on Worksheet 48: ADI inward investing entity's step 4

The average debt is the average value, for the income year, of the ADI's debt capital that gives rise to debt deductions (in Australia) in that year or any other income year. However, it does not include debt that gives rise to allowable off-shore banking deductions

Step 4.3: Divide the amount at D by the amount at E

Insert the result at F on Worksheet 48: ADI inward investing entity's step 4

This step works out what proportion to apply to the ADI's debt deductions to calculate the amount disallowed

Step 4.4: Calculate the amount of debt deductions for the income year

Insert this amount at G on Worksheet 48: ADI inward investing entity's step 4

The calculation is applied to all the ADI's debt deductions for the year, other than allowable off-shore banking deductions

Step 4.5: Multiply the amount at F by the amount at G. This is the amount of debt deductions disallowed

This calculates the amount of debt deduction disallowed. The debt deductions that would be allowed, but for thin capitalisation, are each reduced proportionately

Worksheet 48: ADI inward investing entity's step 4

Steps

\$

Step 4.1: Capital shortfall – minimum capital amount – average equity capital

(D) ______________

Step 4.2: Average debt

(E) ______________

Step 4.3:D   E

(F) _______________

Step 4.4: Debt deductions for the income year

(G) ______________

Step 4.5:F X G. This is the total debt deductions disallowed

= ________________