Who is not affected
An asset that is used (or is held for use) wholly or principally for private or domestic purposes is not subject to the thin capitalisation rules.
For any given income year, the following entities are not affected by the thin capitalisation rules:
- an entity that does not incur debt deductions for the income year
- an entity whose debt deductions, together with those of any associate entities, are less than the de-minimis threshold of $2 million for the income year (see section 820-35 of the ITAA 1997)
- an Australian resident entity that is neither an inward investing entity nor an outward investor
- a foreign entity that has no investment or presence in Australia
- an outward investor that is not also foreign controlled and meets the assets threshold test. This is explained further in section 820-37 of the ITAA 1997.
Certain special purpose entities are also excluded where all of the following apply:
- The entity is established for the purposes of managing some or all of the economic risk associated with assets, liabilities or investments.
- At least 50% of its assets are funded by debt interests.
- The entity is an insolvency remote special purpose entity according to the criteria of an internationally recognised rating agency that are applicable to the entity's circumstances. That entity does not have to have been rated by a rating agency.
Several large entities
Where several large entities are taken to be a single, notional entity, any one of those entities can still meet this exception provided that all the entities taken together would meet the above conditions.
The entity will only be exempted from the thin capitalisation rules for the period that it meets all of the above conditions.
Outward investors that are not also foreign controlled
Section 820-37 of the ITAA 1997 requires that an outward investor that is not also foreign controlled be excluded from the thin capitalisation regime where the sum of its average Australian assets and the average Australian assets of its associates (as defined in section 318 of the ITAA 1936) represents 90% or more of the sum of its average total assets and the average total assets of its associates. The terms 'average Australian assets' and 'average total assets' are specifically defined for the purposes of this test. See Terms we use for more information.
The average Australian assets of an Australian entity means all the Australian entity's assets other than:
- assets attributable to any of the Australian entity's overseas permanent establishments
- any asset to the extent it is either controlled foreign entity debt or controlled foreign entity equity
- any asset that is a debt interest or equity interest held in the Australian entity's associates.
The average Australian assets of a foreign entity for the purposes of the assets threshold test means the foreign entity's assets that are:
- located in Australia
- attributable to any of the foreign entity's Australian permanent establishments
- debt interests and equity interests to the extent they are held in Australian entities that are not attributable to those Australian entities' foreign permanent establishments.
This definition does not include debt interests and equity interests held in any of the foreign entity's associates.
The average total assets for both Australian entities and foreign entities means all assets other than debt interests and equity interests held in the entity's associates.
Some assets and entities are not subject to the thin capitalisation rules.