• Step 1: Calculate the adjusted average debt

    Broadly, the adjusted average debt of a non-ADI financial outward investor 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 1.5. See Cost-free debt capital.

    The adjusted average debt also includes liabilities arising out of arrangements for borrowing securities – see step 1.4.

    Table 16: Non-ADI general outward investor's step 5 and Worksheet 8: Non-ADI financial outward investor's step 1 explain how a non-ADI financial outward investor calculates its adjusted average debt.

    See also:

    Note: Ignore any amounts attributable to any of the entity's overseas permanent establishments.

    Table 16: Non-ADI general outward investor's step 5

    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 8: Non-ADI financial outward 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 interest that does 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 8: Non-ADI financial outward investor's step 1

    Average debt capital is then reduced by the associate entity debt

    Step 1.3: Calculate the average value, for that year, of all the entity's controlled foreign entity debt

    Insert this amount at C on Worksheet 8: Non-ADI financial outward investor's step 1

    Average debt capital is further reduced by any amounts lent to controlled foreign entities of which the entity is an Australian controller

    Step 1.4: Calculate the average value, for that year, of the entity's borrowed securities amount

    Insert this amount at D on Worksheet 8: Non-ADI financial outward 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-buyback arrangement or securities loan arrangement

    Step 1.5: Calculate the average value, for that year, of any of the entity's cost-free debt capital

    Insert this amount at E on Worksheet 8: Non-ADI financial outward investor's step 1

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

    Step 1.6: Calculate the adjusted average debt. Adjusted average debt is the result of ABC + D + E

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

    Worksheet 8: Non-ADI financial outward investor's step 1

    Steps

    $

    Step 1.1: Average debt capital

    (A) __________

    Step 1.2: Average associate entity debt

    (B) __________

    Step 1.3: Average controlled foreign entity debt

    (C) __________

    Step 1.4: Average borrowed securities amount

    (D) __________

    Step 1.5: Average cost-free debt capital

    (E) __________

    Step 1.6: Adjusted average debt = (ABC + D + E)

         __________

    If the entity's 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 more 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 greatest of the safe harbour debt amount – steps 2 and 3, the worldwide gearing debt amount – see step 4 and the arm's length debt amount – see step 5.

    See also:

    • Worked example of calculations for a non-ADI financial outward investor.
    Last modified: 09 Mar 2016QC 48252