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  • 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.

    See also:

    Table 56: ADI inward investing entity's step 4

    Steps

    Comments

    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

    = ________________

    See also:

    • Worked example of calculations for an ADI inward investing entity.
    Last modified: 09 Mar 2016QC 48164