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  • Step 3: Calculate the worldwide gearing debt amount

    The worldwide gearing test is available to non-ADI general outward investors that are not also inward investment vehicles. This test allows the Australian operations of an entity, in certain circumstances, to be geared up to 100% of the gearing of the Australian entity’s worldwide group. The gearing of the entity’s worldwide group is determined by reference to method statements contained in section 820-110 of the ITAA 1997. The worldwide group consists of the Australian entity and the Australian controlled foreign entities for which the Australian entity is an Australian controller.

    Table 13: Non-ADI general outward investor's step 3 and Worksheet 5: Non-ADI general outward investor's step 3 explain how to work out the worldwide gearing debt amount.

    If the entity has associate entities, you also need to work through Table 14: Non-ADI general outward investor's step 3A and Worksheet 6: Non-ADI general outward investor's step 3A.

    See also:

    If the worldwide equity amount (calculated at step 3.2) is a negative amount, the worldwide gearing debt amount cannot be used by the entity as a measure of its maximum allowable debt for the income year. If this is the case, the entity must instead calculate its maximum allowable debt for the income year using either the safe harbour debt amount at step 2 or the arm's length debt amount at step 4.

    Notes:

    • The worldwide gearing debt test is also available to non-ADI general outward investors that are also foreign controlled (inward investment vehicles), if the entity meets certain requirements. The gearing of the entity’s worldwide group is determined by reference to the steps contained in the method statement in section 820-111 of the ITAA 1997.
    • An entity that is the head company of an Australian tax consolidated group or multiple entry consolidated group will be classified as both outward investing and inward investing entity if the following conditions apply:
      • it is foreign controlled
      • it holds investments in a foreign entity or has a foreign permanent establishment.
       

    Explanation

    Step 3 assumes you have completed Worksheet 3: Non-ADI general outward investor's step 2 – the safe harbour debt amount calculation. If you have not, you need to complete steps 2.1 to 2.8 in Worksheet 3: Non-ADI general outward investor's step 2, ignoring any amounts attributable to the entity's overseas permanent establishments.

    Table 13: Non-ADI general outward investor's step 3

    Steps

    Comments

    Step 3.1: Calculate the entity's worldwide debt for the income year

    Insert this amount at Z on Worksheet 6: Non-ADI general outward investor's step 3A

    Worldwide debt is the sum of the debt interests issued by the Australian entity and its Australian controlled foreign entities, other than debt interests issued to each other

    Step 3.2: Calculate the entity's worldwide equity for the income year

    Insert this amount at AA on Worksheet 6: Non-ADI general outward investor's step 3A

    Worldwide equity is the equity capital of the Australian entity and its Australian controlled foreign entities, other than the equity interests held in each other

    Step 3.3: Divide the amount at Z by the amount at AA. This is the worldwide gearing ratio

    Insert the result at BB on Worksheet 5: Non-ADI general outward investor's step 3

    Dividing the worldwide debt by the worldwide equity establishes the worldwide gearing ratio

    Step 3.4:

    Insert the result of BB at CC on Worksheet 5: Non-ADI general outward investor's step 3

     n/a

    Step 3.5: Add 1 (one) to the amount at CC.

    Insert the result at DD on Worksheet 5: Non-ADI general outward investor's step 3

    Steps 3.5 and 3.6 convert the ratio to a fraction, which is later applied to the entity's net Australian assets

    Step 3.6: Divide the amount at CC by the amount at DD.

    Insert the result at EE on Worksheet 5: Non-ADI general outward investor's step 3

     n/a

    Step 3.7: Multiply the amount at EE by the amount at J from the safe harbour debt amount calculation on Worksheet 3: Non-ADI general outward investor's step 2

    Insert the result at FF on Worksheet 5: Non-ADI general outward investor's step 3

    This applies the ratio, expressed as a fraction, to net Australian assets, as calculated at J in Worksheet 3: Non-ADI general outward investor's step 2, the safe harbour debt amount – see step 2.8

    Step 3.8: If the entity does not have any associate entities that are non-ADI outward investors or inward investors, insert 0 (zero) at GG on Worksheet 5: Non-ADI general outward investor's step 3. Otherwise, calculate the average value of the entity's associate entity excess amount – see Worksheet 6: Non-ADI general outward investor's step 3A. Transfer the amount at GG on Worksheet 6: Non-ADI general outward investor's step 3A to GG on Worksheet 5: Non-ADI general outward investor's step3

    This increases the worldwide gearing debt amount by the average associate entity excess amount. The average associate entity excess amount is worked out in step 3A and Worksheet 6: Non-ADI general outward investor's step 3A

    Note: If the entity does not have any associate entities that are non-ADI outward investors or non-ADI inward investors, the average associate entity excess amount is nil

    Step 3.9: Calculate the entity's worldwide gearing debt amount by adding the amounts at FF and GG

    The worldwide gearing debt amount represents the fraction of net Australian assets, increased by any associate entity excess amount
    Worksheet 5: Non-ADI general outward investor's step 3

    Steps

    $

    Step 3.1: Worldwide debt

    (Z) __________

    Step 3.2: Worldwide equity

    (AA) __________

    Step 3.3: Z÷AA

    (BB) __________

    Step 3.4: Insert amount of BB at CC  

    (CC) __________

    Step 3.5: CC + 1

    (DD) __________

    Step 3.6: CC÷ DD

    (EE) __________

    Step 3.7: EE   amount at J on Worksheet 3: Non-ADI general outward investor's step 2

    (FF) __________

    Step 3.8: Average associate entity excess amount – from GG on Worksheet 6: Non-ADI general outward investor's step 3A

    (GG) __________

    Step 3.9: Worldwide gearing debt amount (FF + GG)

    =      ___________

    If the entity's adjusted average debt is equal to or less than this amount, the entity is not disallowed any debt deductions under the thin capitalisation rules. You do not have to complete any further calculations.

    However, if the entity's adjusted average debt is more than the worldwide gearing debt amount, you can choose to calculate an arm's length debt amount under step 4. If you do not want to calculate an arm's length debt amount, you can use your worldwide gearing debt amount as your maximum allowable debt amount and debt deductions will be disallowed on this basis – see step 5.

    Calculating GG: The average associate entity excess amount for the worldwide gearing debt amount

    Table 14: Non-ADI general outward investor's step 3A and Worksheet 6: Non-ADI general outward investor's step 3A set out how to calculate the amount at GG on Worksheet 5: Non-ADI general outward investor's step 3 – 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 GG on Worksheet 5: Non-ADI general outward investor's step 3.

    Step 3.8 equates to step 2.10 in the safe harbour debt amount calculation. The only difference is that when calculating the premium excess amount, the gearing ratio is applied rather than the 1.5:1 ratio. The attributable safe harbour excess amount is calculated in the same manner and can be transferred directly from W on Worksheet 4: Non-ADI general outward investor's step 2A.

    See also:

    Note: An Australian entity will always be an outward investor if it is an associate entity of an outward investor.

    Explanation

    If the entity has more than one associate entity, repeat steps 3A.1 to 3A.6 for each associate entity on each of the investing entity's measurement days. Step 3A assumes you have completed Worksheet 4: Non-ADI general outward investor's step 2A. If you have not, you need to complete steps 2A.1, 2A.2 and 2A.4 to 2A.10, ignoring any amounts attributable to the overseas permanent establishments of the investing entity or associate entity.

    Table 14: Non-ADI general outward investor's step 3A

    Steps

    Comments

    Step 3A.1: Transfer the amount at M on Worksheet 4: Non-ADI general outward investor's step 2A to M on Worksheet 6: Non-ADI general outward investor's step 3A

    This is the value, on a particular measurement day, of the equity the entity has invested in its associate entity, excluding debt interests. This amount has already been worked out on Worksheet 4: Non-ADI general outward investor's step 2A at M (step 2A.1A) and can be transferred directly from there

    Step 3A.2: Transfer the amount from N on Worksheet 4: Non-ADI general outward investor's step 2A to N on Worksheet 6: Non-ADI general outward investor's step 3A

    This is the value, on a particular measurement day, of the associate entity's equity capital attributable to the equity interests held by the entity, excluding the value that represents controlled foreign entity equity of the investing entity. This amount has already been worked out on Worksheet 4: Non-ADI general outward investor's step 2A at N (step 2A.2) and can be transferred directly from there

    Step 3A.3: Calculate the premium excess by deducting the amount at N from the amount at M and multiplying the result by the amount at EE in Worksheet 5: Non-ADI general outward investor's step 3

    Insert the result at HH on Worksheet 6: Non-ADI general outward investor's step 3A

     n/a

    Step 3A.4: Transfer the amount at W on Worksheet 4: Non-ADI general outward investor's step 2A to W on Worksheet 6: Non-ADI general outward investor's step 3A

    This is the attributable safe harbour excess amount for an associate entity on a particular measurement day. This amount has already been worked out at W on Worksheet 4: Non-ADI general outward investor's step 2A (step 2A.10) and can be transferred directly from there

    Step 3A.5: Calculate the entity's associate entity excess amount by adding the amounts at HH – premium excess amount and W – attributable safe harbour excess amount

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

    Step 3A.6: If the entity has only one associate entity, transfer any positive amount at JJ to KK on Worksheet 6: Non-ADI general outward investor's step 3A. Otherwise, repeat steps 3A.1 to 3A.5 for each associate entity. Add all positive results at JJ and insert amount at KK on Worksheet 6: Non-ADI general outward investor's step 3A

    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 KK will be the same as the amount at JJ, provided JJ is positive. If JJ is a negative amount, it is disregarded

    Step 3A.7: Calculate KK – the total associate entity excess amount, steps 3A.1 to 3A.6 – on each other measurement day

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

    Step 3A.8: Calculate the entity's average associate entity excess amount by adding all the results at KK and divide by the number of measurement days. Insert the result at GG on Worksheet 6: Non-ADI general outward investor's step 3A

    The results are added together and divided by the number of measurement days to get the average associate entity excess amount
    Worksheet 6: Non-ADI general outward investor's step 3A

    Steps

    $

    Step 3A.1: Investing entity's associate entity equity on a measurement day from M on Worksheet 4: Non-ADI general outward investor's step 2A

    (M) __________

    Step 3A.2: Associate entity equity capital attributable to the investing entity's equity interests on a measurement day from N on Worksheet 4: Non-ADI general outward investor's step 2A

    (N) __________

    If N is negative, it is taken to be nil

    Step 3A.3: Premium excess amount
    (M – N)   EE

    (HH) __________

    HH may be a negative amount

    Step 3A.4: Attributable safe harbour excess amount from W on Worksheet 4: Non-ADI general outward investor's step 2A

    (W) __________

    Step 3A.5: Associate entity excess amount on a measurement day for one associate entity (HH + W)

    (JJ) __________

    Step 3A.6: Associate entity excess amount on a measurement day for all associate entities; that is, the sum of the positive results at JJ

    Now calculate the associate entity excess amount for all associate entities on the investing entity's other measurement days – see step 3A.7

    (KK) __________

    Step 3A.8: The average value of the associate entity excess amount; that is, the sum of results at KK divided by the number of measurement days

    (GG) __________

    Transfer this amount to GG on Worksheet 5: Non-ADI general outward investor's step 3
    Last modified: 23 Oct 2019QC 48241