• # Step 1: Calculate the adjusted average debt

Broadly, the adjusted average debt of a non-ADI financial inward investment vehicle is the debt capital used in its Australian operations that gives rise to debt deductions. It does not matter whether the debt deductions arise in the year the debt interest was issued or in any other income year.

Debt that does not give rise to any deductible expenditure at any time is generally not included in adjusted average debt. However, it is included if the debt interest is cost-free debt capital – see step 1.4.

The adjusted average debt also includes assets that comprise securities loan arrangement amounts where those amounts do not otherwise qualify as debt interests – see step 1.3.

Table 30: Non-ADI financial inward investment vehicle's step 1 and Worksheet 22: Non-ADI financial inward investment vehicle's step 1 explain how a non-ADI financial inward investment vehicle calculates its adjusted average debt.

Table 30: Non-ADI financial inward investment vehicle's step 1

Steps

Step 1.1: Calculate the average value, for the income year, of all the entity's debt capital that gives rise to its debt deductions for that year or any other income year

Insert this amount at A on Worksheet 22: Non-ADI financial inward investment vehicle's step 1

The entity's debt capital is the average value of all the debt interests issued by the entity that give rise to debt deductions in any year of income. This includes debt interests that do not initially give rise to debt deductions but will do so in the future

Step 1.2: Calculate the average value, for that year, of all the entity's associate entity debt.

Insert this amount at B on Worksheet 22: Non-ADI financial inward investment vehicle's step 1

The average debt capital is then reduced by associate entity debt

Step 1.3: Calculate the average value, for that year, of the entity's borrowed securities amount

Insert this amount at C on Worksheet 22: Non-ADI financial inward investment vehicle's step 1

The amounts included in an entity's borrowed securities amount are explained in Borrowed securities amount. Broadly, they include the entity's liabilities incurred under a repurchase agreement, sell-buy-back arrangement or securities loan arrangement

Step 1.4: Calculate the average value, for that year, of any of the entity's cost-free debt capital.

Insert this amount at D on Worksheet 22: Non-ADI financial inward investment vehicle's step 1

Cost-free debt capital is included in adjusted average debt for integrity reasons

Step 1.5: Calculate the adjusted average debt. Adjusted average debt is the result of AB + C + D

Adjusted average debt represents total debt A less associate entity debt B, increased by certain securities loan arrangement amounts C and cost-free debt capital D

Worksheet 22: Non-ADI financial inward investment vehicle's step 1

Steps

\$

Step 1.1: Average debt capital

(A) _____________

Step 1.2: Average associate entity debt

(B) _____________

Step 1.3: Average borrowed securities amount

(C) _____________

Step 1.4: Average cost-free debt capital

(D) ____________

(AB + C + D)

=_____________

If the adjusted average debt is zero or a negative amount, the entity has not exceeded its maximum allowable debt and it is not disallowed any debt deductions under the thin capitalisation rules. You do not have to complete any further calculations.

If adjusted average debt is a positive amount, you need to calculate the entity's maximum allowable debt amount, which is the greater of the:

• safe harbour debt amount – steps 2 and 3
• arm's length debt amount – step 4
• worldwide gearing amount – step 5.