• Step 6: Calculate the debt deductions disallowed

    The entity's maximum allowable debt is the greater of the:

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

    You do not necessarily have to calculate all amounts. If you do not want to calculate an arm's length debt amount or the worldwide gearing debt amount you can use the safe harbour debt amount as the maximum allowable debt.

    If the entity's adjusted average debt is more than its maximum allowable debt, a proportion of its debt deductions cannot be deducted. Table 49: Non-ADI financial inward investor's step 6 and Worksheet 41: Non-ADI financial inward investor's step 6 work out the proportion disallowed.

    See also:

    Table 49: Non-ADI financial inward investor's step 6

    Steps

    Comments

    Step 6.1: Calculate the amount by which the entity's adjusted average debt exceeds its maximum allowable debt; that is the excess debt

    Insert the result at EE on Worksheet 41: Non-ADI financial inward investor's step 6

    The proportion of debt deductions disallowed depends on the amount by which the entity's adjusted average debt (from step 1) exceeds its maximum allowable debt

    Step 6.2: Calculate the entity's average debt. Insert this amount at FF on Worksheet 41: Non-ADI financial inward investor's step 6

    The average debt is the average value for the income year of:

    • all debt capital that gives rise to debt deductions in the income year or any other income year – this is the amount calculated at A on Worksheet 35: Non-ADI financial inward investor's step 1, see step 1.1
    • the entity's cost-free debt capital that is included in its adjusted average debt – this is the amount calculated at D on Worksheet 35: Non-ADI financial inward investor's step 1, see step 1.4
     

    Step 6.3: Divide the amount at EE by the amount at FF

    Insert the result at GG on Worksheet 41: Non-ADI financial inward investor's step 6

    This step works out what proportion to apply to the entity's debt deductions to calculate the amount disallowed

    Step 6.4: Calculate the amount of the entity's debt deductions for the income year

    Insert this amount at HH on Worksheet 41: Non-ADI financial inward investor's step 6

    The calculation is applied to all the entity's debt deductions for the year

    Step 6.5: Multiply the amount at GG by the amount at HH. This is the total debt deductions disallowed

    This calculates the amount of debt deduction disallowed. The debt deductions that would be allowed, but for thin capitalisation, are each reduced proportionately

    Worksheet 41: Non-ADI financial inward investor's step 6

    Steps

    $

    Step 6.1: Excess debt; that is, adjusted average debt – maximum allowable debt

    (EE) _____________

    Step 6.2: Average debt

    (FF) ______________

    Step 6.3:EE   FF

    (GG) _____________

    Step 6.4: Debt deductions for the income year

    (HH) _____________

    Step 6.5: Total debt deductions disallowed (GG x HH)

    = _______________

    This is the amount of debt deductions the non-ADI financial inward investor is not allowed to deduct under the thin capitalisation rules.

    See also:

    • Worked example of calculations for a non-ADI financial inward investor.
    Last modified: 09 Mar 2016QC 48257