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.
See also:
Table 30: Non-ADI financial inward investment vehicle's step 1
Steps
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Comments
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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
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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
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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
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The average debt capital is then reduced by associate entity debt
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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
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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
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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
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Cost-free debt capital is included in adjusted average debt for integrity reasons
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Step 1.5: Calculate the adjusted average debt. Adjusted average debt is the result of A – B + C + D
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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
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Worksheet 22: Non-ADI financial inward investment vehicle's step 1
Steps
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$
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Step 1.1: Average debt capital
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(A) _____________
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Step 1.2: Average associate entity debt
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(B) _____________
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Step 1.3: Average borrowed securities amount
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(C) _____________
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Step 1.4: Average cost-free debt capital
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(D) ____________
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Step 1.5: Adjusted average debt
(A – B + C + D)
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=_____________
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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.
See also:
- Worked example of calculations for a non-ADI financial inward investment vehicle.
How to do the first step of your calculations to check if you meet the requirements under the thin capitalisation rules if you are a non-ADI financial inward investment vehicle.