• Step 1: Calculate the adjusted average debt

    The adjusted average debt of a non-ADI general 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 1.3.

    Table 37: Non-ADI general inward investor's step 1 and Worksheet 29: Non-ADI general inward investor's step 1 explain how a non-ADI general inward investor calculates its adjusted average debt.

    See also:

    Table 37: Non-ADI general 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 29: Non-ADI general 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 of all the entity's associate entity debt, to the extent it is attributable to the entity's Australian permanent establishments, for that year

    Insert this amount at B on Worksheet 29: Non-ADI general inward investor's step 1

    The average value of debt capital is then reduced by 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 of any of the entity's cost-free debt capital, for that year.

    Insert this amount at C on Worksheet 29: Non-ADI general inward investor's step 1

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

    Step 1.4: Calculate the adjusted average debt. This is the result of A – B + C.

    Adjusted average debt represents total debt (A) less associate entity debt (B), increased by cost-free debt capital (C).

    Worksheet 29: Non-ADI general 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: Cost-free debt capital

    (C) ______________

    Step 1.4: Adjusted average debt (AB + C)

    = _______________

    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 further calculations.

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

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

    See also:

    • Worked example of calculations for a non-ADI general inward investor.
    Last modified: 09 Mar 2016QC 48259