• 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 assets and excludes amounts lent to, and invested in, associate entities.

    Table 11: Non-ADI general outward investor's step 2 and Worksheet 3: Non-ADI general outward investor's step 2 explain how to work out the safe harbour debt amount.

    If the entity has any associate entities, you must also work through Table 12: Non-ADI general outward investor's step 2A and Worksheet 4: Non-ADI general outward investor's step 2A.

    See also:

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

    Table 11: Non-ADI general outward investor's step 2

    Steps

    Comments

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

    Insert this amount at E on Worksheet 3: Non-ADI general outward investor's step 2

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

    Step 2.2: Calculate the average value of the entity's excluded equity interests for that year

    Insert this amount at QQ on Worksheet 3: Non-ADI general outward investor's step 2

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

    Step 2.3: Transfer the amount from B on Worksheet 2: Non-ADI general outward investor's step 1 to B on Worksheet 3: Non-ADI general outward investor's step 2

    This is the average associate entity debt and is the same amount calculated at B on Worksheet 2: Non-ADI general outward investor's step 1 – step 1.2 – and can be transferred directly from there. Associate entity debt is a loan asset of the lending entity, representing, broadly, the debt interest issued to the lender by its associate entity

    Step 2.4: Calculate the average value of all the entity's associate entity equity for that year

    Insert this amount at F on Worksheet 3: Non-ADI general outward investor's step 2

    Associate entity equity is, broadly, the sum of the equity invested in, and interest-free loans granted to, associate entities. Associate entity equity is an asset of the investing entity

    Step 2.5: Transfer the amount from C on Worksheet 2: Non-ADI general outward investor's step 1 to C on Worksheet 3: Non-ADI general outward investor's step 2

    This is the average value of debt lent to controlled foreign entities of which the outward investor is an Australian controller. It is the same amount calculated at C on Worksheet 2: Non-ADI general outward investor's step 1 – step 1.3 – and can be transferred directly from there.

    Controlled foreign entity debt is a loan asset of the lender, representing the debt interests issued to the lender by the controlled foreign entity

    Step 2.6: Calculate the average value of all the entity's controlled foreign entity equity for that year

    Insert this amount at G on Worksheet 3: Non-ADI general outward investor's step 2

    This is the average value of equity invested in controlled foreign entities for which the outward investor is an Australian controller. Controlled foreign entity equity is an asset of the investing entity

    Step 2.7: Calculate the average value of all the entity's non-debt liabilities for that year

    Insert this amount at H on Worksheet 3: Non-ADI general outward investor's step 2

     

    Step 2.8: Calculate the net Australian assets funded by debt and equity. This is the result of EQQ PPBFCGH

    Insert the result at J on Worksheet 3: Non-ADI general outward investor's step 2

    This step reduces the total assets at F by the amounts worked out in steps 2.2 to 2.7. The amount at J represents the net Australian assets funded by debt and equity

    Step 2.9: Multiply the amount at J by 3/5. Insert the result at K on Worksheet 3: Non-ADI general outward investor's step 2

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

    Step 2.10: If the entity does not have any associate entities that are non-ADI outward investors or inward investors, insert 0 (zero) at L on Worksheet 3: Non-ADI general outward investor's step 2

    Otherwise, calculate the entity's average associate entity excess amount – see Worksheet 4: Non-ADI general outward investor's step 2A

    Transfer the amount at L on Worksheet 4: Non-ADI general outward investor's step 2A to L on Worksheet 3: Non-ADI general outward investor's step 2

    The average associate entity excess amount is, broadly, the excess borrowing capacity of any associate entities. It also recognises any premium paid for the investment in an associate entity. This amount is worked out in step 2A – L on Worksheet 4: Non-ADI general outward investor's step 2A

    Note: If the entity has no associate entities that are non-ADI outward investors or non-ADI inward investors, the average associate entity excess amount is zero

    Step 2.11: Calculate the entity's safe harbour debt amount by adding the amounts at K and L

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

    Worksheet 3: Non-ADI general outward investor's step 2

    Steps

    $

    Step 2.1: Average assets

    (E) __________

    Step 2.2: Average excluded equity interests

    (QQ) _________

    Step 2.3: Average associate entity debt – from B on Worksheet 2: Non-ADI general outward investor's step 1

    (B) __________

    Step 2.4: Average associate entity equity

    (F) __________

    Step 2.5: Average controlled foreign entity debt – from C on Worksheet 2: Non-ADI general outward investor's step 1

    (C) __________

    Step 2.6: Average controlled foreign entity equity

    (G) __________

    Step 2.7: Average non-debt liabilities

    (H) __________

    Step 2.8:EQQBFCGH

    (J) __________

    If J is negative, it is taken to be zero

    Step 2.9:J x 3/5

    (K) __________

    Step 2.10: Average associate entity excess amount – from L on Worksheet 4: Non-ADI general outward investor's step 2A

    (L) __________

    If no associate entities, this is zero

    Step 2.11 : Safe harbour debt amount = (K + L)

        ___________

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

    • worldwide gearing debt amount under step 3 if the entity is not foreign controlled
    • arm's length 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 outward investor.

    Calculating L – the average associate entity excess amount for the safe harbour debt amount

    Table 12: Non-ADI general outward investor's Step 2A and Worksheet 4: Non-ADI general outward investor's step 2A set out how to calculate the amount at L on Worksheet 3: Non-ADI general outward investor's step 2 – the average associate entity excess amount.

    If the entity has no associate entities that are non-ADI outward investors or non-ADI inward investors, do not complete this step and show zero at L on Worksheet 3: Non-ADI general outward investor's step 2.

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

    Associate entity excess amount

    The associate entity excess amount is the sum of the premium excess and the attributable safe harbour excess amounts. The associate entity excess amount is calculated on each of the investing entity's measurement days for each associate entity.

    Example 11: Using the opening and closing balances measurement method

    An investing entity uses the opening and closing balances measurement method, therefore it must calculate its associate entity excess amount on the opening day and closing day of the income year.

    End of example

    The positive amounts are added together and divided by the number of 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:

    Remember:

    • Ignore any amounts attributable to any overseas permanent establishments of the entity or associate entities.
    • An Australian entity that is an associate entity of an outward investor will itself always be an outward investor.
    Last modified: 09 Mar 2016QC 48235