• Step 5: Calculate the debt deductions disallowed

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

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

    You do not 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 42: Non-ADI general inward investor's step 5 and Worksheet 34: Non-ADI general inward investor's step 5 work out the proportion disallowed.

    See also:

    Table 42: Non-ADI general inward investor's step 5

    Steps

    Comments

    Step 5.1: 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 X on worksheet 5

    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 5.2: Calculate the entity's average debt.

    Insert this amount at Y on Worksheet 34: Non-ADI general inward investor's step 5

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

    • debt capital that gives rise to debt deductions in the income year or any other income year. This is the amount calculated at A in Worksheet 29: Non-ADI general 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 C in Worksheet 29: Non-ADI general inward investor's step 1, see step 1.3

    Step 5.3: Divide the amount at X by the amount at Y

    Insert the result at Z on Worksheet 34: Non-ADI general inward investor's step 5

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

    Step 5.4: Calculate the amount of debt deductions for the income year

    Insert this amount at AA on Worksheet 34: Non-ADI general inward investor's step 5

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

    Step 5.5: Multiply the amounts at Z by the amount at AA. This is the amount of 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 34: Non-ADI general inward investor's step 5

    Steps

    $

    Step 5.1: Excess debt; that is adjusted average debt – maximum allowable debt

    (X) _______________

    Step 5.2: Average debt

    (Y) _______________

    Step 5.3:X   Y

    (Z) _______________

    Step 5.4: Debt deductions for the income year

    (AA) ______________

    Step 5.5: Total debt deductions disallowed (Z x AA)

    = ________________

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

    See also:

    • Worked example of calculations for a non-ADI general inward investor.
    Last modified: 09 Mar 2016QC 48263