• Step 3: Calculate the worldwide capital amount

    A foreign controlled ADI cannot apply the worldwide capital test. If the ADI is foreign controlled, go directly to step 4.

    The worldwide capital test is available to an ADI outward investing entity that is not also foreign controlled. This test allows an ADI to capitalise its Australian operations by up to 20% less than the capital ratio of the ADI's worldwide group. The worldwide group consists of the Australian ADI and the controlled foreign entities for which the ADI is an Australian controller.

    Table 52: ADI outward investing entity's step 3 and Worksheet 44: ADI outward investing entity's step 3 explain how to work out the worldwide capital amount.

    You will need a copy of the prudential standards to work out the worldwide capital amount.

    See also:

    Note: a reference to a worldwide group below is a reference to a consolidated group within the meaning of the prudential standards.

    Explanation

    Step 3 assumes you have completed the safe harbour capital amount calculation. If you have not, you need to complete step 2.1 and 2.3, ignoring any amounts attributable to the ADI's permanent establishments.

    Table 52: ADI outward investing entity's step 3

    Steps

    Comments and instructions

    Step 3.1: Calculate the average value of the eligible tier 1 capital (within the meaning of the prudential standards) for the worldwide group of which the ADI is a member.

    Insert this amount at F on Worksheet 44: ADI outward investing entity's step 3

    This is the average value of eligible tier 1 capital (within the meaning of the prudential standards) of the worldwide group of which the ADI is a member. Tier 1 capital is also calculated in accordance with the prudential standards

    Step 3.2: Calculate the average value of the worldwide group's risk-weighted assets

    Insert this amount at G on Worksheet 44: ADI outward investing entity's step 3

    This is the average value of the worldwide group's risk-weighted assets. Risk-weighted assets are calculated in accordance with the prudential standards

    Step 3.3: Divide the amount at F by the amount at G

    Insert the result at H on Worksheet 44: ADI outward investing entity's step 3

    Dividing the worldwide group's tier 1 capital by the worldwide group's risk-weighted assets establishes the capital ratio of the worldwide group

    Step 3.4: Calculate the average value of the risk weighted assets of the entity

    Insert the result at I on Worksheet 44: ADI outward investing entity's step 3

    This is the average value of the ADI's risk-weighted assets attributable to its Australian operations. Therefore, risk-weighted assets attributable to the entity's overseas permanent establishments, assets comprised by the controlled foreign entity equity of the entity and assets for which prudential capital deductions must be made by the entity are all excluded

    Step 3.5: Multiply the amount at H by 8/10.

    Insert the result at J on Worksheet 44: ADI outward investing entity's step 3.

    This decreases the worldwide capital ratio by 20%.

    Step 3.6: Multiply the amount at I by the amount at J.

    Insert the result at K on Worksheet 44: ADI outward investing entity's step 3

    This applies the reduced worldwide capital ratio to the ADI's Australian risk-weighted assets.

    Step 3.7: Transfer the amount at E on Worksheet 43: ADI outward investing entity's step 2 to E on Worksheet 44: ADI outward investing entity's step 3

    This is the average value of the ADI's tier 1 prudential capital deductions. It has already been calculated at E on Worksheet 43: ADI outward investing entity's step 2 – see step 2.3

    Step 3.8: Calculate the ADI's worldwide capital amount by adding the amounts at K and E

     

    Worksheet 44: ADI outward investing entity's step 3

    Steps

    $

    Step 3.1: Worldwide group's average tier 1 capital

    (F) ______________

    Step 3.2: Worldwide group's average risk-weighted assets

    (G) ______________

    Step 3.3:F   G

    (H) ______________

    Step 3.4: ADI's average risk-weighted assets attributable to its Australian operations

    (I) ______________

    Step 3.5:H x 8/10

    (J) ______________

    Step 3.6:I x J

    (K) ______________

    Step 3.7: ADI's average tier 1 prudential capital deductions from E on Worksheet 43: ADI outward investing entity's step 2

    (E) ______________

    Step 3.8: Worldwide capital amount (K+E)

    = ________________

    If the ADI's adjusted average equity capital is equal to or more than the worldwide capital amount, the ADI is not disallowed any debt deductions under the thin capitalisation rules. You do not have to complete any more calculations.

    If the ADI's adjusted average equity capital is less than both the worldwide capital amount and the safe harbour capital amount, you can choose to calculate an arm's length capital amount for the ADI – see step 4. If you do want to calculate an arm's length capital amount, you can use your worldwide capital amount as the minimum capital amount and debt deductions will be disallowed on this basis – see step 5.

    See also:

    • Worked example of calculations for an ADI outward investing entity.
    Last modified: 09 Mar 2016QC 48183