When a financial entity can elect to apply the ADI thin capitalisation rules
Some financial entities may undertake similar activities to banks – ADIs. For this reason, and in certain circumstances, a financial entity can elect to use the thin capitalisation rules that apply to ADI entities. The rules for making this election are contained in Subdivision 820-EA of the ITAA 1997.
How to make an election
The entity does not have to tell us about their choice. Their choice is effective from the period that started on or after a day specified in the choice. If the entity has not specified a day, their choice is effective from the day they made it.
See also:
Conditions you must meet
To be entitled to make this election, the financial entity must meet either of the two conditions set out below. The entity must test itself for these conditions every three years. This means if the entity doesn't satisfy these conditions, the choice to apply the ADI rules is not automatically revoked. It is only if the entity does not meet these conditions at the end of the third income year after the choice is made (or after the last time the entity was required to test), that the choice is revoked.
Condition 1 – The average value of the financial entity's on-lent amount in an income year must be equal to or more than 80% of the average value of its assets in that same income year.
Condition 2 – The entity must, for the first part of the income year, satisfy either of the following conditions:
- It is a financial entity because it is a financial services licensee within the meaning of the Corporations Act 2001 whose licence covers dealings in derivatives or is exempt from holding such a licence because of paragraph 911A(2)(h) or (l) of the Corporations Act 2001, or
- It is a head company of a consolidated group of MEC group and at least one member of the group is a financial entity because it is a financial services licensee within the meaning of the Corporations Act 2001 whose licence covers dealings in derivatives or is exempt from holding such a licence because of paragraph 911A(2)(h) or (l) of the Corporations Act 2001.
Condition 2 valuation: Regardless of which of the above points the entity satisfies, the sum of the entity's average on-lent amount and average net unrealised gains on derivatives must be greater than or equal to 80% of the entity's average total assets, net of unrealised losses on derivatives.
It should also be noted that the on-lent amount of the entity will also include the average value for the year of any precious metal assets that the entity holds for that income year.
Table 8: Condition 2 valuation
Steps
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Comments
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Step 1.1: Calculate the average value, for the income year, of the entity's on-lent amount and the average value of its assets that are precious metals
Insert this amount at A of Worksheet 46: ADI inward investing entity's step 1
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The term on-lent amount is explained in Terms we use. Average values are discussed in Average values
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Step 1.2: Calculate the average value, for the income year, of the entity's unrealised gains on trading derivatives
Insert this amount at B of Worksheet 46: ADI inward investing entity's step 1
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The term 'trading derivatives' has the meaning it has in the Corporations Act 2001
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Step 1.3: Calculate the average value, for the income year, of the entities unrealised losses on derivatives. This amount is the lesser of the entity's:
- unrealised losses on trading derivatives
- unrealised gains on trading derivatives
Insert this amount at C of Worksheet 46: ADI inward investing entity's step 1
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Step 1.4: Take the amount at C from the amount at B
Insert the result at D in Worksheet 46: ADI inward investing entity's step 1
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This figure can never be less than zero
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Step 1.5: Add the amounts at A and D together
Insert the result at E in Worksheet 46: ADI inward investing entity's step 1
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Step 1.6: Calculate the average value, for the income year, of the entity's total assets
Insert this amount at F in Worksheet 46: ADI inward investing entity's step 1
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Step 1.7: Take the amount at C from the amount at F
Insert the result at G in Worksheet 46: ADI inward investing entity's step 1
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Step: 1.8: Divide the amount at E by the amount at G
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If this is equal to or greater than 0.8, the entity has satisfied the condition
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Worksheet 1: Steps to work out the condition 2 valuation
Steps
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$
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Step 1.1: Average on-lent amount
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(A) _____________
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Step 1.2: Average unrealised gains on trading derivatives
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(B) _____________
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Step 1.3: Average unrealised losses on trading derivatives
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(C) _____________
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Step 1.4: B − C
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(D) _____________
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Step 1.5: A + D
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(E) _____________
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Step 1.6: Average total assets
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(F) _____________
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Step 1.7: F − C
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(G) _____________
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Step 1.8: E / G
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______________
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See also:
Some financial entities may undertake similar activities to banks – ADIs. For this reason, and in certain circumstances, a financial entity can elect to use the thin capitalisation rules that apply to ADI entities.