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    Capital shortfall

    A capital shortfall is the amount by which an ADI's adjusted average equity capital (for ADI outward investing entities) or average equity capital (for ADI inward investing entities) is less than its minimum capital amount. This amount is used to calculate the proportion of debt deductions disallowed.

    See also:

    Consolidatable group

    This is a group of entities that are eligible to be a consolidated group and will exist providing there is, in addition to the head company, at least one subsidiary member.

    See also:

    Consolidated group

    A consolidated group is a head company and all of the subsidiary members of the group, if any.

    In general, before a consolidated group can be brought into existence, both of the following must exist:

    • a consolidatable group
    • an effective choice made by the head company of the consolidatable group to consolidate the group.

    A consolidated group that is formed in this way comes into existence from the date specified in the notice of choice given to us.

    See also:

    Controlled foreign entity

    See Australian controlled foreign entity

    Controlled foreign entity debt

    Broadly, controlled foreign entity debt is debt interests issued by a controlled foreign entity to an Australian controller of that entity or to an associate entity of that Australian controller.

    Controlled foreign entity debt is relevant to calculating a non-ADI outward investor's maximum allowable debt and adjusted average debt amounts.

    An entity can have an amount of controlled foreign entity debt if it is a non-ADI outward investing entity and either of the following apply:

    • It is an Australian controller of a controlled foreign entity.
    • Its associate entity is an Australian controller of a controlled foreign entity.

    The controlled foreign entity debt is then the sum of the debt interests held by such an entity that:

    • are on issue
    • were issued by the controlled foreign entity – whether or not to the current holder
    • give rise to a cost covered by paragraph 820-40(1)(a) of the ITAA 1997, which is listed in point 1 of the definition of 'debt deduction' in this section.

    Controlled foreign entity debt does not include a debt interest to the extent it is attributable to any assets:

    • attributable to the controlled foreign entity's Australian permanent establishments
    • held by the controlled foreign entity for the purposes of producing the controlled foreign entity's assessable income. The value of these debt interests will be included in associate entity debt.

    See also:

    Controlled foreign entity debt and the assets threshold test

    Controlled foreign entity debt is the sum of all of the debt interests held by an entity:

    • those that are on issue
    • those that were issued by the controlled foreign entity, whether or not to the current holder
    • those that give rise to a cost covered by point 1 of the definition of debt deduction.

    Controlled foreign entity debt does not include a debt interest to the extent it is attributable to any assets attributable in the controlled foreign entity's Australian permanent establishments or any assets held by the controlled foreign entity for the purpose of producing the controlled foreign entity's Australian assessable income.

    Controlled foreign entity equity

    Broadly, this is the equity interest held in a controlled foreign entity by an Australian controller of that entity or by an associate entity of that Australian controller. It may also include certain debt interests.

    Controlled foreign entity equity is relevant to calculating both of the following:

    • a non-ADI outward investor's maximum allowable debt
    • an ADI outward investing entity's minimum capital and adjusted average equity capital amounts.

    An entity can have an amount of controlled foreign entity equity if it is an outward investing entity – non-ADI or ADI – and either of the following apply

    • it is an Australian controller of a controlled foreign entity
    • its associate entity is an Australian controller of a controlled foreign entity.

    The controlled foreign entity equity is the sum of all of the following:

    • the equity interests held by the Australian controller or associate entity in the controlled foreign entity
    • the debt interests held by such an entity that
      • are on issue
      • were issued by the controlled foreign entity, whether or not to the current holder, and
      • do not give rise to a cost covered by paragraph 820-40(1)(a) of the ITAA 1997. This is listed in point 1 of the definition of debt deduction in this section.

    The controlled foreign entity equity does not include equity interests and debt interests to the extent they are attributable to any assets:

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

    The value of these interests will be included in associate entity equity.

    See also:

    Controlled foreign entity equity and the assets threshold test

    The controlled foreign entity equity is the sum of all of the following:

    • the equity interests held by the Australian controller of the controlled foreign entity, or associate entity that is an Australian controller of the controlled foreign entity
    • the debt interests held by such an entity that
      • are on issue
      • were issued by the controlled foreign entity, whether or not to the current holder
      • do not give rise to a cost covered by point 1 of the definition of debt deduction.

    Controlled foreign entity equity does not include equity interests and debt interests to the extent they are attributable to any assets attributable to the controlled foreign entity's Australian permanent establishment or any assets held by the controlled foreign entity of the purposes of producing the controlled foreign entity's Australian assessable income.

    Corporate limited partnership

    A partnership that is a corporate limited partnership under section 94D ITAA 1936.

    Cost-free debt capital

    Broadly, this is an entity's debt capital that does not give rise to debt deductions but has certain features that make it possible to manipulate asset and debt levels to the advantage of the lender and/or the borrower.

    Debt interests issued by an entity that do not give rise to any debt deductions are generally treated as neither debt nor non-debt liabilities. This means that such debt interests are generally not included in adjusted average debt and do not reduce assets when calculating the safe harbour debt amount. However, as an integrity measure, these debt interests may be included in a non-ADI's adjusted average debt where the arrangement contains features that make it possible to manipulate the debt and asset levels to the advantage of either or both of the lender and borrower. To this end, debt interests will be included in adjusted average debt if they are cost-free debt capital.

    An entity (the borrower) can have a cost-free debt capital amount if both of the following apply:

    • It is a
      • non-ADI outward investor
      • non-ADI inward investment vehicle, or
      • non-ADI inward investor that holds assets attributable to its Australian permanent establishment or other assets held for the purposes of producing its Australian assessable income.
    • It is not
      • an exempt entity, and
      • excepted from the thin capitalisation rules by either the debt deduction threshold or asset threshold rules, or because of section 820-39, which exempts certain special purpose vehicles.

    The asset threshold only applies to entities that are outward investing entities (non-ADI or ADI) not inward investing entities (non-ADI or ADI).

    The borrower's cost-free debt capital is then the total value of all the debt interests issued by it that:

    If the lender (or holder of the debt interest):

    • meets the same conditions as the borrower (see above), the measurement days used by the borrower to measure its adjusted average debt are different to the measurements days used by the lender to measure its assets; that is, either the method used to calculate average values is different or the actual measurement days are different or both are different
    • does not meet the same conditions as the borrower; that is, the lender is not required to apply the thin capitalisation rules, the debt interest has been on issue for less than 180 days at the measurement day.

    If the total period for which the interest is on issue is ultimately 180 days or more, the debt interest is not taken to be cost-free debt capital.

    Example 16: Debt interests

    An entity with a standard income year issues a debt interest that does not give rise to any debt deductions on 1 June 2008. The holder of that interest is not subject to the thin capitalisation rules. As at 30 June 2008 the debt interest is classified as debt-free capital. On 28 December 2008, the debt interest is still on issue. As it has been on issue for more than 180 days, it will be taken not to have been cost-free debt capital on 30 June 2008

    End of example

    See also:

    If the borrower is a foreign entity, debt interests can only form part of its cost-free debt capital to the extent they are attributable to assets attributable to the foreign entity's Australian permanent establishments or to other assets held for the purposes of producing the foreign entity's Australian assessable income.

    See also:

    Last modified: 09 Mar 2016QC 48154