• Step 2: Calculate the safe harbour debt amount

    The safe harbour debt amount is an objective level of debt that an entity can use to fund the assets used in its Australian operations. This amount is based on the value of Australian investments and excludes amounts lent to, and invested in, associate entities. 'Australian investments' in this context means assets that are either of the following:

    • attributable to the entity's Australian permanent establishments
    • held for the purposes of producing the entity's assessable income.

    These are referred to as Australian assets.

    Example12: Types of investments

    A rental property located in Australia would be held for the purposes of producing assessable income. Australian shares that are taxable Australian property (see section 855-10 of the ITAA 1997) would be held for the purposes of producing assessable income.

    Australian shares that are not taxable Australian property would not be held for the purposes of producing assessable income because these shares would not give rise to a capital gain or loss on disposal. In addition, any dividend income, although subject to withholding tax, is excluded from assessable income and therefore the shares cannot be held for the purposes of producing assessable income (see section 128D of the ITAA 1936).

    End of example

    Table 38: Non-ADI general inward investor's step 2 and Worksheet 30: Non-ADI general inward investor's step 2 explain how to work out the safe harbour debt amount.

    If the entity has any associate entities that are subject to the thin capitalisation rules, you also need to work through Table 39: Non-ADI general inward investor's step 2A and Worksheet 31: Non-ADI general inward investor's step 2A.

    See also:

    Table 38: Non-ADI general inward investor's step 2

    Steps

    Comments

    Step 2.1: Calculate the average value of all the entity's Australian assets for the income year

    Insert this amount at D on Worksheet 30: Non-ADI general inward investor's step 2

    The first step is to work out the average value of the entity's Australian assets

    Step 2.1A: Calculate the average value, for that year, of all the entity's excluded equity interests

    Insert this amount at JJ on Worksheet 30: Non-ADI general inward investor's step 2

    Certain short-term equity interests reduce the safe harbour debt amount for integrity reasons

    See excluded equity interests

    Step 2.2: Transfer the amount from B on Worksheet 29: Non-ADI general inward investor's step 1 to B on Worksheet 30: Non-ADI general inward investor's step 2

    This is the average associate entity debt attributable to the entity's Australian permanent establishments. It is the same amount calculated at B on Worksheet 29: Non-ADI general inward investor's step 1 (step 1.2 ) and can be transferred directly in from there

    Step 2.3: Calculate the average value of all the entity's associate entity equity that had arisen because of the entity's Australian assets for that year

    Insert this amount at E on Worksheet 30: Non-ADI general inward investor's step 2

    This is the average associate entity equity attributable to the entity's Australian permanent establishments.

    Step 2.4: Calculate the average value of all the entity's non-debt liabilities that have arisen because of the Australian assets for that year

    Insert this amount at F on Worksheet 30: Non-ADI general inward investor's step 2

     

    Step 2.5: Calculate the entity's net Australian assets funded by debt and equity. This is the result of D – JJ – B – E –F

    Insert the result at G on Worksheet 30: Non-ADI general inward investor's step 2

    This step reduces total assets (D) by the amounts worked out in steps 2.1A to 2.4. The amount at G represents the net Australian assets funded by debt and equity.

    Step 2.6: Multiply the amount at G by 3/5

    Insert the result at H on Worksheet 30: Non-ADI general inward investor's step 2

    Multiplying the amount at G (net assets) by 3/5 reflects the debt to equity ratio of 1.5:1

    Step 2.7: If the entity does not have any associate entities that are non-ADIs and subject to the thin capitalisation rules, insert 0 (zero) at J on Worksheet 30: Non-ADI general inward investor's step 2. Otherwise, calculate the entity's average associate entity excess amount (see Worksheet 31: Non-ADI general inward investor's step 2A). Transfer the amount at J on Worksheet 31: Non-ADI general inward investor's step 2A to J on Worksheet 30: Non-ADI general inward investor's step 2

    The average associate entity excess amount is, broadly, the excess borrowing capacity of any associate entity that is a non-ADI entity and is subject to the thin capitalisation rules. It also recognises any premium paid for the investment in an associate entity. This amount is worked out in step 2A (J on Worksheet 31: Non-ADI general inward investor's step 2A)

    Note: If the entity has no associate entities that are non-ADIs and subject to the thin capitalisation rules, the average associate entity excess amount is zero

    Step 2.8: Calculate the entity's safe harbour debt amount by adding the amounts at H and J

    The safe harbour debt amount represents 3/5 of net Australian assets, increased by any associate entity excess amount

    Worksheet 30: Non-ADI general inward investor's step 2

    Steps

    $

    Step 2.1: Average Australian assets

    Step 2.1A: Average excluded equity interests

    (D) _______________

    (JJ) _______________

    Step 2.2: Average associate entity debt – from B on Worksheet 29: Non-ADI general inward investor's step 1

    (B) _______________

    Step 2.3: Average associate entity equity

    (E) _______________

    Step 2.4: Average non-debt liabilities

    (F) ________________

    Step 2.5: DJJBEF

    (G) _______________

    If G is negative, it is taken to be zero

    Step 2.6: G X 3/5

    (H) _______________

    Step 2.7: Average associate entity excess amount – from J on Worksheet 31: Non-ADI general inward investor's step 2A

    (J) _______________

    Step 2.8: Safe harbour debt amount (H + J)

    = ________________

    This is the entity's safe harbour debt amount.

    If the entity’s adjusted average debt is more than the safe harbour debt amount, you can choose to calculate the entity’s:

    • arm’s length debt amount under step 3
    • worldwide gearing debt amount under step 4

    If you do not want to calculate a worldwide gearing debt amount or an arm’s length debt amount, you can use your safe harbour debt amount as your maximum allowable debt and debt deductions will be disallowed on this basis – see step 5.

    See also:

    • Worked example of calculations for a non-ADI general inward investor.

    Calculating J: The average associate entity excess amount for the safe harbour debt amount

    Table 39: Non-ADI general inward investor's step 2A and Worksheet 31: Non-ADI general inward investor's step 2A set out how to calculate the amount at J on Worksheet 30: Non-ADI general inward investor's step 2 – the average associate entity excess amount.

    If the entity has no associate entities that have been attributed to an Australian permanent establishment and that are non-ADI entities that are subject to the thin capitalisation rules, do not complete this step. Show zero at J on Worksheet 30: Non-ADI general inward investor's step 2.

    The associate entity excess amount is the sum of the following two amounts:

    The associate entity excess amount is calculated on each of the investing entity's measurement days for each associate entity. For example, if the entity uses the opening and closing balances measurement method, it must calculate its associate entity excess amount on the opening day and closing day of the income year. The positive amounts are added together and divided by the measurement days to calculate the average associate entity excess amount. Negative amounts are disregarded because a negative associate entity excess amount for one associate entity does not reduce a positive associate entity excess amount for another associate entity.

    See also:

    If the entity has more than one associate entity, repeat steps 2A.1 to 2A.12 for each associate entity on each of the investing entity's measurement days. The associate entity must be a non-ADI and subject to the thin capitalisation rules.

    Table 39: Non-ADI general inward investor's step 2A

    Steps

    Comments

    Step 2A.1: Calculate, on a particular measurement day, the value of the entity's associate entity equity attributable to the associate entity, less the value of any debt interests issued to the investing entity by the associate entity

    Insert this amount at K on Worksheet 31: Non-ADI general inward investor's step 2A

    This is the value, on a measurement day, of the equity the entity has invested in its associate entity. This excludes any debt interests that may be included in associate entity equity

    Step 2A.2: Calculate, on the measurement day, the value of the associate entity's equity capital that is attributable to the entity's Australian assets

    Insert this amount at L on Worksheet 31: Non-ADI general inward investor's step 2A

    This is the value, on a measurement day, of the associate entity's equity capital attributable to the investing entity's Australian assets. This is measured by the associate entity in accordance with the accounting standards

    Step 2A.3: Calculate the entity's premium excess amount by deducting the amount at L from the amount at K and multiplying the result by 3/5

    Insert this result at M on Worksheet 31: Non-ADI general inward investor's step 2A

     

    Step 2A.4: Calculate the associate entity's safe harbour debt amount on the measurement day as if the period consisted of one day only. If the associate entity is a financial inward investment vehicle, it is treated as a general entity inward for these purposes

    Insert this amount at N on Worksheet 31: Non-ADI general inward investor's step 2A

    The safe harbour debt amount must be calculated for the associate entity on a measurement day.

    If the associate entity is an:

    • inward investor, complete the calculations in step 2 of 'Non-ADI general inward investor' for the associate entity
    • inward investment vehicle, complete the safe harbour debt calculation in step2 of 'Non-ADI general inward investment vehicle' for the associate entity.
     

    Step 2A.5: Calculate, on the measurement day, the value of the associate entity's adjusted average debt as if the period consisted of one day only. Again, the associate entity is always treated as a general entity

    Insert this amount at P on Worksheet 31: Non-ADI general inward investor's step 2A

    You must also work out the associate entity's adjusted average debt on a measurement day

    Step 2A.6: Deduct the amount at P from the amount at N

    Insert the result at Q on Worksheet 31: Non-ADI general inward investor's step 2A

    Taking the adjusted average debt (P) away from the safe harbour debt amount (N) gives the associate entity's excess borrowing capacity on a measurement day. If the associate entity has exceeded its safe harbour debt amount, this amount will be negative and is treated as zero

    Step 2A.7: Calculate, on the measurement day, the sum of the value of the:

    • associate entity's equity capital attributable to the investing entity
    • debt interests issued to the investing entity by the associate entity 
      • that are on issue
      • of which no part forms part of the associate entity's cost-free debt capital
      • that do not give rise to costs covered by paragraph 820-40(1)(a) of the ITAA 1997
       
    • debt interests issued to the investing entity by the associate entity that 
      • are on issue
      • give rise to costs covered by paragraph 820-40(1)(a) of the ITAA 1997 but those costs are not deductible from the associate entity's assessable income in any income year
       

    Insert the result at R on Worksheet 31: Non-ADI general inward investor's step 2A

    This works out the value of the associate entity's equity capital (including certain debt interests) attributable to the investing entity on a measurement day

    Step 2A.8: Calculate, on the measurement day, the sum of the value of all the:

    • associate entity's equity capital
    • debt interests issued by the associate entity 
      • that are on issue
      • of which no part forms part of the associate entity's cost-free debt capital
      • that do not give rise to costs covered by paragraph 820-40(1)(a) of the ITAA 1997
       
    • debt interests issued by the associate entity that 
      • are on issue
      • give rise to costs covered by paragraph 820-40(1)(a) but those costs are not deductible from the associate entity's assessable income in any income year
       

    Insert this amount at S on Worksheet 31: Non-ADI general inward investor's step 2A

    This is to work out the value of the associate entity's total equity capital (including certain debt interests) on a measurement day

    Step 2A.9: Divide the amount at R by the amount at S

    Insert the result at T on Worksheet 31: Non-ADI general inward investor's step 2A

    This works out the proportion of the associate entity's equity capital attributable to the investing entity on a measurement day

    Step 2A.10: Calculate the entity's attributable safe harbour excess amount by multiplying the amount at Q by the amount at T where:

    Q is the associate entity's excess capacity

    T is the proportion of equity capital attributable to the investing entity

    Insert the result at U on Worksheet 31: Non-ADI general inward investor's step 2A

    This applies the proportion worked out in step 2A.9 to the associate entity's excess borrowing capacity to work out the amount of that excess capacity that can be attributed to the investing entity

    Step 2A.11: Calculate the entity's associate entity excess amount by adding the amounts at:

    M – premium excess amount

    U – attributable safe harbour excess amount

    Insert the result at V on Worksheet 31: Non-ADI general inward investor's step 2A

    This is the associate entity excess amount for a single associate entity on a measurement day of the investing entity

    Step 2A.12: If the entity has only one associate entity, transfer any positive amount at V to W on Worksheet 31: Non-ADI general inward investor's step 2A. Otherwise, repeat steps 2A.1 to 2A.11 for each associate entity. Then add all positive results at V and insert at W on Worksheet 31: Non-ADI general inward investor's step 2A

    The associate entity excess amount must be worked out for each associate entity on a measurement day. Add all the positive associate entity excess amounts together to get the total associate entity excess amount on any particular measurement day. If the entity has only one associate entity, the amount at W will be the same as the amount at V, provided V is positive. If V is negative, it is disregarded

    Step 2A.13: Calculate W; that is the total associate entity excess amount – steps 2A.1 to 2A.12, on each other measurement day

    The associate entity excess amount for all associate entities is calculated on each of the investing entity's measurement days

    Step 2A.14: Calculate the entity's average associate entity excess amount by adding the results at W for each measurement day and divide by the number of measurement days

    Insert the result at J on Worksheet 30: Non-ADI general inward investor's step 2

    The results are added together and divided by the number of measurement days to get the average associate entity excess amount

    Worksheet 31: Non-ADI general inward investor's step 2A

    Steps

    $

    2A.1: Investing entity's associate entity equity on a measurement day

    (K) ______________

    2A.2: Associate entity's equity capital attributable to the investing entity on a measurement day

    (L) ______________

    If L is negative, it is taken to be nil

    2A.3: Premium excess amount (KL) x 3/5

    (M) ____________

    M may be a negative amount

    2A.4: Associate entity's safe harbour debt amount on a measurement day

    (N) ______________

    2A.5: Associate entity's adjusted average debt on a measurement day

    (P) ______________

    2A.6: NP

    (Q) ______________

    If Q is negative, it is taken to be nil

    2A.7: Associate entity's equity capital attributable to investing entity on a measurement day

    (R) ______________

    2A.8: Associate entity's total equity capital on a measurement day

    (S) ______________

    2A.9: R   S

    (T) ______________

    2A.10: Attributable safe harbour excess amount (Q x T)

    (U) ______________

    2A.11: Associate entity excess amount on a measurement day for one associate entity (M +U)

    (V) ______________

    2A.12: Associate entity excess amount on a measurement day for all associate entities (sum of all positive results at V)

    (W) _____________

    Note: Now calculate the associate entity excess amount for all associate entities on the investing entity's other measurement days – step 2A.13

     

    2A.14: The average value of the associate entity excess amount. That is, the sum of results at W divided by the number of measurement days

    = (J) ____________

    Transfer this amount to J on Worksheet 30: Non-ADI general inward investor's step 2

    Last modified: 09 Mar 2016QC 48260