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Treatment if classified as an outward investing ADI

Explains the treatment if classified as an outward investing ADI.

Last updated 8 March 2016

Where the head company or single company is classified as an outward investing ADI, Subdivision 820-D of the ITAA 1997 applies to determine its thin capitalisation position. The calculations in Subdivision 820-D are based on the APRA rules. However, as the group may contain entities that are not supervised by APRA, the rules for calculating adjusted average equity capital and the safe harbour capital amount in Subdivision 820-D of the ITAA 1997 are modified. These modifications relate to how:

  • adjusted average equity capital is calculated
  • the safe harbour capital amount is calculated.

Calculating adjusted average equity capital

In the case of a head company of a MEC group, the head company's ADI equity capital is worked out using all of the following points:

  • by taking into account the equity interests or debt interests held in the head company by entities outside the group
  • on the basis that an equity interest or debt interest in an eligible tier 1 company (other than the head company) that is a member of the group at that time is treated as an equity interest or debt interest (as appropriate) in the head company, but only if it is held at that time by an entity that is not a member of the group
  • on the basis of the information that would be contained in a set of consolidated accounts
    • prepared, in accordance with the accounting standard on consolidated accounts, as at that time, and
    • covering the members of the group as at that time.
     

Where the head company or single company includes an Australian branch of an establishment entity as part of itself for thin capitalisation purposes, the head company or single company's adjusted average equity capital is increased by the average value of both of the following:

  • so much of the establishment entity's ADI equity capital that is attributable to its Australian branch that has not been allocated to the offshore banking activities of the entity
  • any loans that the establishment entity has provided to its Australian branch that do not give rise to debt deductions in that income year or any other income year.

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Calculating the safe harbour capital amount

The second modification relates to the calculation of the safe harbour capital amount where an Australian branch of an establishment entity is included in a group or is treated as a part of a single company. When calculating the safe harbour capital amount, the head company or single company includes in its risk-weighted assets so much of the establishment entity's risk-weighted assets that are both of the following:

  • attributable to the Australian branch included in the group
  • not attributable to the off-shore banking activities of the establishment entity.

See also:

QC48190