• Step 1: Calculate the adjusted average debt

    The adjusted average debt of a non-ADI financial inward investor is, broadly, 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 43: Non-ADI financial inward investor's step 1 and Worksheet 35: Non-ADI financial inward investor's step 1 explain how a non-ADI financial inward investor calculates its adjusted average debt.

    See also:

    Table 43: Non-ADI financial inward investor's step 1

    Steps

    Comments

    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 35: Non-ADI financial inward investor'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 income year

    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, to the extent it is attributable to the entity's Australian permanent establishments

    Insert this amount at B on Worksheet 35: Non-ADI financial inward investor's step 1

    The average value of debt capital is then reduced by the associate entity debt, to the extent those amounts are attributable to the foreign entity's Australian permanent establishments

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

    Insert this amount at C on Worksheet 35: Non-ADI financial inward investor'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 35: Non-ADI financial inward investor's step 1

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

    Step 1.5: Calculate the adjusted average debt. This 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 35: Non-ADI financial inward investor's step 1

    Steps

    $

    Step 1.1: Average debt capital

    (A) ______________

    Step 1.2: Average associate entity debt attributable to the Australian permanent establishment

    (B) ______________

    Step 1.3: Average borrowed securities amount

    (C) ______________

    Step 1.4: Cost-free debt capital

    (D) ______________

    Step 1.5: Adjusted average debt (AB + C + D)

    = _______________

    Is adjusted average debt zero or a negative amount?

    If so, the entity has not exceeded its maximum allowable debt and it is not disallowed any debt deductions under thin capitalisation rules. You do not have to complete any further calculations.

    If the entity's 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), the arm's length debt amount (step 4) and the worldwide gearing debt amount (step 5).

    See also:

    • Worked example of calculations for a non-ADI financial inward investor.
    Last modified: 09 Mar 2016QC 48251