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On 8 April 2024, the Treasury Law Amendment (Making Multinationals Pay Their Fair Share - Integrity and Transparency) Act 2024 was enacted. The amendments apply to assessments for income years commencing on or after 1 July 2023, with the exception of new integrity rules (debt deduction creation rules) which apply in relation to assessments for income years starting on or after 1 July 2024. Under the new thin capitalisation rules:
ADIs, securitisation vehicles and certain special purpose entities are excluded from the debt deduction creation rules. Entities that are Australian plantation forestry entities are excluded from the new rules. For these entities, the previous rules will continue to apply. |
The five steps a non-ADI general inward investment vehicle takes to calculate if they have met the thin capitalisation rules are:
- Step 1: Calculate the adjusted average debt
- Step 2: Calculate the safe harbour debt amount
- Step 3: Calculate the arm's length debt amount
- Step 4: Calculate the worldwide gearing debt amount
- Step 5: Calculate debt deductions disallowed.
This worked example goes through each of these steps.
See also
Worked example
Aust Co is a general Australian entity. It is wholly owned by a foreign company (the worldwide parent entity) called For Co. This makes Aust Co an inward investment vehicle. Aust Co also owns 60% of the equity in an Australian company, which is also a general entity – Ozzie Co. Aust Co has $1.5 million of non-debt liabilities and has borrowed:
- $9 million from an unrelated financial institution
- $5 million from its foreign parent.
Aust Co has also:
- invested $6 million equity in Ozzie Co
- lent Ozzie Co $3 million.
The $6 million equity investment represents what Aust Co paid a third party for 60% of the equity in Ozzie Co. For Co has invested $4 million equity in Ozzie Co and owns 40% of the equity in Ozzie Co.
Neither Aust Co nor Ozzie Co has any overseas permanent establishments. All loans are at commercial interest rates. No election has been made to form a consolidated group for tax purposes.
For the purposes of this example, Aust Co is the only entity being tested under the thin capitalisation rules. The test year is the 2014–15 income year.
The table below shows Aust Co's assets and liabilities for year ending 30 June 2015 – average values using the opening and closing balances option.
Assets |
$m |
Liabilities |
$m |
|---|---|---|---|
Current |
4 |
Loans |
14 |
|
|
Aust Co has $2,100,000 million worth of debt deductions in the 2014–15 income year and fails the debt deduction de-minimus test. Because Aust Co is foreign controlled, it cannot apply the asset de-minimus test. |
The table below shows Ozzie Co's assets and liabilities at 1 July 2014.
Assets |
$m |
Liabilities |
$m |
|---|---|---|---|
Current assets |
6 |
Share capital |
9.5 |
|
|
The table below shows Ozzie Co's assets and liabilities at 30 June 2015.
Assets |
$m |
Liabilities |
$m |
|---|---|---|---|
Current assets |
6.5 |
Share capital |
9.5 |
14.5 |
14.5 |
For the purposes of this example, the worldwide parent entity’s audited consolidated financial statement at 30 June 2015 show:
- Statement worldwide debt of $20 million
- Statement worldwide equity of $30 million
- Statement worldwide assets of $50 million.
Step 1: Calculate Aust Co's adjusted average debt
Worksheet 1: Aust Co's step 1
Steps |
$m |
||
|---|---|---|---|
Step 1.1: The average value of all Aust Co's debt capital that gives rise to debt deductions is $14m |
Average debt capital |
(A) |
14 |
Step 1.2: Aust Co's associate entity debt is the $3m debt interest issued by Ozzie Co |
Average associate entity debt |
(B) |
3 |
Step 1.3: All Aust Co's debt capital gives rise to debt deductions |
Average cost-free debt capital |
(C) |
0 |
Step 1.4: Aust Co's adjusted average debt is $11m |
Adjusted average debt (A – B + C) |
= |
11 |
Aust Co's adjusted average debt is $11 million. This is now compared to Aust Co's maximum allowable debt, which is the greater of its:
- safe harbour debt amount
- arm's length debt amount
- worldwide gearing debt amount.
Aust Co can calculate these amounts in any order it chooses and does not necessarily have to calculate all amounts.
Step 2: Calculate Aust Co's safe harbour debt amount
Worksheet 2: Aust Co's step 2
Steps |
$m |
||
|---|---|---|---|
Step 2.1: The average value of Aust Co's assets is $17m |
Average assets |
(D) |
17 |
Step 2.1A: None of the equity interests issued by Aus Co are excluded equity interests |
Average excluded equity interests |
(JJ) |
0 |
Step 2.2: The average value of Aust Co's associate entity debt is $3m |
Average associate entity debt (from B on worksheet 1) |
(B) |
3 |
Step 2.3: The average value of Aust Co's associate entity equity is the $6m invested in Ozzie Co |
Average associate entity equity |
(E) |
6 |
Step 2.4: The average value of Aust Co's non-debt liabilities is $1.5m |
Average non-debt liabilities |
(F) |
1.5 |
Step 2.5: Reduce Aust Co's average assets by the amounts at JJ, B, E & F |
D – JJ – B – E – F |
(G) |
6.5 |
Step 2.6: Multiply the result at G by 3/5 |
G x 3/5 |
(H) |
3.9 |
Step 2.7: The average value of Aust Co's associate entity excess is $3.42million – see worksheet 2A |
Average associate entity excess amount from J on worksheet 2A |
(J) |
3.42 |
Step 2.8: Aust Co's safe harbour debt amount is $7.32 m |
Safe harbour debt amount = H + J |
|
7.32 |
Step 2A: Calculate Aust Co's average associate entity excess amount for the safe harbour debt amount
Aust Co's associate entity excess amount is calculated on each of its measurement days. Aust Co uses the opening and closing balances method so its measurement days are 1 July 2014 (the first day of the period) and 30 June 2015 (the last day of the period).
Worksheet 2A: Aust Co's step 2A
Steps |
1 July 2014 |
30 June 2015 |
||
|---|---|---|---|---|
Step 2A.1: Aust Co's associate entity equity on a measurement day is the $6m invested in Ozzie Co |
Aust Co's associate entity equity on a measurement day |
(K) |
6 |
6 |
Step 2A.2: The value of Ozzie Co's equity capital attributable to Aust Co (60%) is $6.3m on 1 July and $6.6m on 30 June |
Ozzie Co's equity capital attributable to Aust Co on a measurement day |
(L) |
6.3 |
6.6 |
Step 2A.3: Aust Co's premium excess amount is calculated by reducing the amount at K by the amount at L and multiplying the result by 3/5 |
(K – L) 3/5. |
(M) |
(0.18) |
(0.36) |
Step 2A.4: Ozzie Co's safe harbour debt amount (calculated using step 2 and worksheet 2 of this guide) on a measurement day is assets less non-debt liabilities multiplied by 3/5 |
Ozzie Co's safe harbour debt amount on a measurement day |
(N) |
8.1 |
8.4 |
Step 2A.5: Ozzie Co's adjusted average debt (calculated using step 1 and worksheet 1 of this guide) is the $3m borrowed from Aust Co |
Ozzie Co's adjusted average debt on a measurement day |
(P) |
3 |
3 |
Step 2A.6: Ozzie Co's excess borrowing capacity is safe harbour debt less adjusted average debt |
N – P |
(Q) |
5.1 |
5.4 |
Step 2A.7: The value of Ozzie Co's equity capital attributable to Aust Co on a measurement day is the same as the amounts at L |
Ozzie Co's equity capital attributable to Aust Co on a measurement day |
(R) |
6.3 |
6.6 |
Step 2A.8: Ozzie Co's total equity capital is $10.5 on 1 July and $11m on 30 June |
Ozzie Co's total equity capital |
(S) |
10.5 |
11 |
Step 2A.9: The proportion of Ozzie Co's equity capital held by Aust Co is 60% |
R S |
(T) |
0.6 |
0.6 |
Step 2A.10: The attributable safe harbour excess amount is the proportion of equity capital held by Aust Co, (60%), multiplied by the excess borrowing capacity (Q) |
Q T |
(U) |
3.06 |
3.24 |
Step 2A.11: The associate entity excess amount is the sum of premium excess amount and the safe harbour excess amount |
M + U |
(V) |
3.24 |
3.6 |
Step 2A.12: Aust Co has only one associate entity, so W is the same as V |
Transfer from V |
(W) |
3.24 |
3.6 |
Step 2A.13: W is calculated for the other measurement day. This has been done in the far right column |
(3.24 + 3.6) /2 |
(J) |
3.42 |
|
|
Transfer to J on worksheet 2 |
|||
Aust Co's safe harbour debt amount is $7,320,000. Aust Co's adjusted average debt amount is more than this amount. Aust Co can calculate an alternative amount under the arm's length debt amount test (though this may not be higher than the safe harbour debt amount) and the worldwide gearing debt amount or can use the safe harbour debt amount as its maximum allowable debt.
Step 3: Calculate Aust Co's arm's length debt amount
For the purposes of this exercise, assume Aust Co chooses not to calculate an arm's length debt.
See also
- taxation ruling TR 2003/1
Step 4: Calculate Aust Co's worldwide gearing debt amount
An entity cannot use the worldwide gearing debt test unless it satisfies an assets threshold. This threshold requires that the entity’s Australian assets represent no more than 50 per cent of the consolidated group’s worldwide assets.
Aust Co’s.average Australian assets for the year are $17m and statement worldwide assets is $50m. The result of applying the above formula is 0.34, therefore Aust Co is eligible to apply the new worldwide gearing debt test.
Worksheet 4: Aust Co's step 4
Steps |
|
||
|---|---|---|---|
Step 4.1: Aust Co's statement worldwide debt is $20m Statement worldwide debt does not include debt lent from an entity within the worldwide group |
Statement worldwide debt |
(Z) |
$20m |
Step 4.2: Aust Co's statement worldwide equity is $30m Note: worldwide equity does not include equity invested from an entity within the worldwide group |
Worldwide equity |
(AA) |
$30m |
Step 4.3: Aust Co's worldwide gearing ratio is calculated by dividing its worldwide debt by its worldwide equity |
Z / AA |
(BB) |
0.6666666 |
Step 4.4: Insert the amount of BB at CC |
BB |
(CC) |
.6666666 |
Step 4.5: Add 1 (one) to the amount at CC |
CC + 1 |
(DD) |
1.6666666 |
Step 4.6: Divide the amount at CC by the amount at DD |
CC DD |
(EE) |
0.3999999 |
Step 4.7: The gearing ratio is applied to Aust Co's net assets as calculated at G on worksheet 2 |
EE x $6.5 |
(FF) |
$2,599,999 |
Step 4.8: Add the average value of Aust Co's associate entity excess amount |
Average associate entity excess amount from Step 4A |
|
$2m |
Step 4.9: Aust Co's worldwide gearing debt amount is calculated by adding the amounts at FF and GG |
Worldwide gearing debt amount |
$4,599,999 |
|
Step 4A: Calculate Aust Co's average associate entity excess amount for the worldwide gearing debt amount
For the purposes of this exercise, assume Aust Co has an associate excess amount of $2m.
See also
- section 820-920 of the ITAA 1996 for method statement.
Aust Co's worldwide gearing debt amount is $4,599,999. This is less than its safe harbour debt amount. Aust Co can calculate an alternative amount under the arm's length debt test. Aust Co could also choose to not calculate an arm's length debt amount (as this may be less than safe harbour debt amount as well) and use the safe harbour debt amount as its maximum allowable debt to calculate the proportion of debt deductions that is disallowed.
Step 5: Calculate Aust Co's debt deductions disallowed
Aust Co's maximum allowable debt is $7,320,000 – the safe harbour debt amount. As Aust Co's adjusted average debt ($11 million) is more than its maximum allowable debt, a proportion of its debt deductions will be disallowed.
Aust Co's debt deductions are $2.1 million.
Worksheet 5: Aust Co's step 5
Steps |
|
|
$m |
|---|---|---|---|
Step 5.1: Aust Co's adjusted average debt is $11m and its maximum allowable debt is $7,320,000 |
Excess debt ($11m − $7.32) |
(X) |
$3.68 |
Step 5.2: Aust Co's average debt is $14m. It includes debt on-lent to associate entities. |
Average debt |
(Y) |
$14 |
Step 5.3: Divide the amount at X by the amount at Y to get the proportion to be applied to Aust Co's debt deductions |
X Y $3.68m / $14m |
(Z) |
0..262857 |
Step 5.4: Aust Co's debt deductions are $2.1m for the income year |
Debt deductions |
(AA) |
$2.1 |
Step 5.5: Multiply the amount at Z by the amount at AA. This is the total debt deductions disallowed to Aust Co |
Z AA 0.262857 x $2.1 |
=$0.551999 |
|
Aust Co is disallowed $551,999 of its debt deductions.
The steps a non-ADI general inward investment vehicle takes to calculate if they've met thin capitalisation rules.