• Who is affected

    The thin capitalisation rules affect:

    • Australian entities with certain overseas operations, and their associate entities (outward investors)
    • Australian entities that are foreign controlled (inward investors)
    • foreign entities with operations or investments in Australia that are claiming debt deductions (inward investors).

    The thin capitalisation rules can apply to companies, trusts, partnerships, unincorporated bodies and individuals.

    An outward investor is an Australian entity that is any of the following:

    • an Australian controller of an Australian controlled foreign entity
    • an entity that carries on business through an overseas permanent establishment, such as a branch
    • an associate entity of either of the above.

    An Australian controller is an entity that either has at least a 10% thin capitalisation control interest in an Australian controlled foreign entity or otherwise has substantive control of an Australian controlled foreign entity. An example of an outward-investing entity is an Australian company that has a 51% shareholding in a New Zealand company. See Control of your entity.

    An inward investing entity is either of the following:

    • an Australian entity controlled by a foreign entity; that is, a foreign controlled Australian entity
    • a foreign entity (although all foreign entities are inward investing entities, the thin capitalisation rules only affect those with Australian income-producing assets).

    An example of the first type of inward investing entity is an Australian company that is a subsidiary of a United States company. An example of the second type of inward investing entity is a foreign entity that owns a rental property located in Australia or a foreign entity that has a permanent establishment in Australia.

    Associate entities

    The thin capitalisation rules also affect associate entities of outward investors. An associate entity is an entity (entity A) that is an associate of another entity (entity B) under section 318 of the Income Tax Assessment Act 1936 (ITAA 1936), and at least one of the following apply:

    • Entity B holds an interest of 50% or more in entity A.
    • Entity A (either directly or indirectly) is accustomed, under an obligation, or reasonably expected to act in accordance with the directions, instructions or wishes of entity B in relation to whether entity A retains or distributes its profits or its financial policies.

    See Terms we use for more information about the meaning of associate entity.

    If entity A is an associate entity of entity B, entity B is automatically an associate entity of entity A. Also, if two separate entities are both associate entities of the same entity, they are also associate entities of each other. An example of this is two companies that are subsidiaries of the same parent company. As they are both associate entities of the parent company, they are also associate entities of each other.

    There are additional special rules to deal with financing arrangements between associate entities that are not grouped.

    Start date

    The thin capitalisation rules apply from an entity's first income year, starting on or after 1 July 2001.

    Last modified: 09 Mar 2016QC 48116