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  • Section D: Thin capitalisation

    In this section

    30a Did the thin capitalisation rules affect you?

    You may be excluded from the requirement to apply the thin capitalisation provisions in subdivision 820-B, 820-C, 820-D or 820-E of the ITAA 1997 if one of the following applies:

    • you and all of your relevant associate entities have total debt deductions of $2 million or less for 2021–22 under section 820-35 of the ITAA 1997
    • you satisfy section 820-37 of the ITAA 1997
    • you satisfy section 820-39 of the ITAA 1997.

    If one of the above exclusions applied, answer No at A item 30a and go to question 30b.

    If the thin capitalisation rules in subdivision 820-B, 820-C, 820-D or 820-E of the ITAA 1997 applied to you, answer Yes at A item 30a then go to question 31.

    For more information about the thin capitalisation rules, see Thin capitalisation.

    30b Did you rely on one of the following tests in determining the thin capitalisation rules did not disallow any of your debt deductions?

    The information you provide at this question tells us which threshold or exemption you have utilised to exclude yourself from the requirement to apply the thin capitalisation provisions in subdivision 820-B, 820-C, 820-D or 820-E of the ITAA 1997.

    If you and all your associate entities have total debt deductions of $2 million or less for 2021–22 under section 820-35 of the ITAA 1997, answer Yes at A item 30b then go to item 40.

    If you are an outward investing entity that is not also an inward investing entity, and the sum of you and your associate’s average Australian assets is equal or greater than 90% of the sum of you and your associate’s total assets, answer Yes at B item 30b then go to item 40.

    If you are a special purpose entity for the purposes of section 820-39 of the ITAA 1997, you are exempt from the thin capitalisation rules.

    A special purpose entity is:

    • an entity established for the purposes of managing some or all of the economic risk associated with assets, liabilities or investments, and
    • the total value of debt interest in the entity is at least 50% of the total value of the entity’s assets, and
    • the entity satisfies the criteria for an insolvency-remote special purpose entity of an internationally recognised rating agency.

    If this exemption applies to you, answer Yes at C item 30b then go to item 40.

    Question 31 Election under subdivision 820-FB

    This question is relevant if you are an Australian resident company that has elected under subdivision 820-FB of the ITAA 1997 to treat their qualifying branch operations as part of a consolidated group, multiple entry consolidated (MEC) group or single company for thin capitalisation purposes.

    If you carry on qualifying Australian branch operations that your related Australian consolidated group, MEC group or single company has elected under subdivision 820-FB of the ITAA 1997 to treat as part of itself for thin capitalisation purposes, you will not be required to complete the remaining thin capitalisation questions. This is because the questions must be completed in the return of the head company or the single company on the basis of including your branch operations.

    If an Australian resident company has elected under subdivision 820-FB of the ITAA 1997 to treat your qualifying Australian branch operations as part of its consolidated group, MEC group or single company for thin capitalisation purposes, answer Yes at A item 31 and write the ABN of the electing Australian company at B item 31 and then go to question 40.

    If you do carry on qualifying Australian branch operations that are not treated as part of a consolidated group, MEC group or single company by reason of the operation of subdivision 820-FB, you must complete the following thin capitalisation questions for the branch operations.

    Question 32 Entity type

    This question ascertains your thin capitalisation entity type at the end of the year.

    The thin capitalisation rules apply differently depending on an entity's type. To work out how the thin capitalisation rules apply to a particular entity we need to know which category the entity belongs to.

    If your type of thin capitalisation entity changed during 2021–22, you only need to complete section D for the type of thin capitalisation entity you were at the end of 2021–22 or relevant period.

    To complete this question, ascertain your entity code from the table below.

    At A, write the code which represents the type of thin capitalisation entity you are at the end of 2021–22 or relevant period. If you do not know what type of entity you are, see the relevant provisions in Division 820 of the ITAA 1997.

    Non-authorised deposit-taking institution (Non-ADI)

    Code

    Type

    1

    Outward investor (general) under subsections 820-85(2) and 820-583(2) and is not also an inward investment vehicle (general) under subsections 820-185(2) and 820-583(5)

    2

    Outward investor (financial) under subsections 820-85(2) and 820-583(3) and is not also an inward investment vehicle (financial) under subsections 820-185(2), 820-583(6) and 820-609(6)

    3

    Inward investment vehicle (general) under subsections 820-185(2) and 820-583(5) and is not also an outward investor (general) under subsections 820-85(2) and 820-583(2)

    4

    Inward investment vehicle (financial) under subsections 820-185(2), 820-583(6) and 820-609(6) and is not also an outward investor (financial) under subsections 820-85(2) and 820-583(3)

    5

    Inward investor (general) under subsection 820-185(2)

    6

    Inward investor (financial) under subsection 820-185(2)

    9

    Inward investment vehicle (general) under subsections 820-185(2) and 820-583(5) and is also an outward investor (general) under subsections 820-85(2) and 820-583(2)

    10

    Inward investment vehicle (financial) under subsections 820-185(2), 820-583(6) and 820-609(6) and is also an outward investor (financial) under subsections 820-85(2) and 820-583(3)

    Authorised deposit-taking institution (ADI)

    Code

    Type

    7

    Outward investing entity (ADI) under subsections 820-300(2), 820-583(7), 820-587 and 820-609

    8

    Inward investing entity (ADI) under subsections 820-395(2) and 820-609(4)

    Question 33 Change in entity status

    This question ascertains if you have changed your entity status from general to financial during 2021–22.

    The thin capitalisation provisions categorise non-ADI entities as either:

    • a kind of financial entity (covered by code 2, 4, 6 or 10), or
    • a kind of general entity (covered by code 1, 3, 5 or 9).

    See the above table of thin capitalisation entity types.

    If you have changed your entity type for thin capitalisation from general to financial during 2021–22, answer Yes at A item 33.

    For more information about the different types of thin capitalisation entities, see the provisions in the Non-authorised deposit-taking institution (Non-ADI) table.

    Question 34 Method for calculating average values

    This question seeks to ascertain your method for calculating average values.

    At A item 34, write the code from the table below that represents the type of averaging method you used for calculating 'average values'.

    Type of averaging method used for calculating 'average values'

    Code

    Averaging method used

    1

    Opening and closing balances method under section 820-635

    2

    Three measurement days method under section 820-640

    3

    Frequent measurement (quarterly) method under subsection 820-645(2)

    4

    Frequent measurement (regular intervals) method under subsection 820-645(4)

    For more information about these methods or 'average values', see Division 820 of the ITAA 1997.

    Question 35 General information for all thin capitalisation entity types

    This question requires information for all thin capitalisation entity types.

    The dollar amounts or values asked for in this question are all based on your tax records.

    You must complete all items. However, if you have written code 7 or 8 (ADI) at A item 32 you do not need to complete D item 35.

    At A item 35, write the total amount of your debt deductions for 2021–22 that are allowable before applying the thin capitalisation provisions in Division 820 of the ITAA 1997.

    At B item 35, write the amount of your debt deductions for any debt interest held or ultimately funded (via a back-to-back arrangement) by a non-resident person who is either a controller or majority owner of you, or is controlled or majority owned by the same persons as you (this includes majority ownership through other companies, partnerships or trusts). If none of the debt deductions shown at A item 35 were for debt interests held or ultimately funded by such non-resident entities, write 0 (zero) at B.

    At C item 35, write the amount of your debt deductions that are disallowed for 2021–22 under the following sections if you have written:

    • code 1, 2, 9 or 10 at A item 32, the amount disallowed under sections 820-115 and 820-120
    • code 3, 4, 5 or 6 at A item 32, the amount disallowed under sections 820-220 and 820-225
    • code 7 at A item 32, the amount disallowed under sections 820-325 and 820-330
    • code 8 at A item 32, the amount disallowed under sections 820-415 and 820-420.

    At D item 35, write the amount of your adjusted average debt for 2021–22 worked out under the following sections if you have written:

    • code 1, 2, 9 or 10 at A item 32, under subsection 820-85(3)
    • code 3, 4, 5 or 6 at A item 32, under subsection 820-185(3).

    Question 36 Authorised deposit taking institutions

    This question requires information if you were an authorised deposit taking institution (ADI).

    If you were an ADI for 2021–22 and have written code 7 or 8 (ADI) at A item 32, answer Yes at A item 36 and complete the required fields.

    If you have written code 1, 2, 3, 4, 5, 6, 9 or 10 (non-ADI) at A item 32 answer No at A.

    If you have written code 7 (outward investing entity ADI) at A item 32 write the following amounts:

    • At B, write the amount of your adjusted average equity capital worked out under subsection 820-300(3).
    • At C, write your safe harbour capital amount determined under section 820-310. If you have calculated a safe harbour capital amount and relied on the arm’s length method or world-wide capital method, write the amount you calculated for the safe harbour capital amount at C.
    • At D, write the amount by which your minimum capital amount determined under section 820-305 exceeds the amount of your adjusted average equity capital written at B.
    • At E, write the amount of the average value of risk-weighted assets that you include in step 1 in section 820-310 (after excluding the value of risk-weighted assets attributable to the assets specified in paragraphs (a), (b) and (c) of step 1 in section 820-310).
    • At F, write the amount of ADI equity capital attributable to your overseas permanent establishments that you were required, under paragraph 820-300(3)(a), to subtract in determining the amount of adjusted average equity capital you had to write at B item 36.
    • At G, write the amount of the average value of your total risk-weighted assets, used to work out your Tier 1 capital reported to APRA for your ADI group, attributable to your overseas permanent establishments that you were required, under paragraph (a) of step 1 in section 820-310, to subtract in determining the amount of the average value of risk-weighted assets you had to write at E item 36.
    • At H, write the amount of the average value of all your controlled foreign entity equity, within the meaning of section 820-890, that you were required, under paragraph 820-300(3)(b), to subtract in determining the amount of adjusted average equity capital you had to write at B item 36.
    • At I, write the amount of tier 1 prudential capital deductions that you include in step 3 in section 820-310.

    If you have written code 8 (inward investing entity ADI) at A item 32 write the following amounts:

    • At B, write the amount of the average equity capital worked out under subsection 820-395(3).
    • At C, write your safe harbour capital amount determined under section 820-405. If you have calculated a safe harbour capital amount and relied on the arm’s length method, write the amount you calculated for the safe harbour capital amount at C.
    • At D, write the amount by which your minimum capital amount determined under section 820-400 exceeds the amount of your average equity capital written at B.
    • At J, write the amount of the average value of all your risk weighted assets attributable to your Australian permanent establishments (but after excluding those assets which are attributable to offshore banking activities) that you include in step 1 of section 820-405.
    • At K, write the amount of the average value of the total amounts you have made available to your Australian permanent establishments, that will never give rise to any debt deductions, that you are entitled to include, under paragraph 820-395(3)(b), in working out the amount of average equity capital you had to write at B item 36.

    Question 37 Non-authorised deposit taking institutions

    This question requires information if you were not an authorised deposit taking institution (ADI).

    If you have written code 7 or 8 (ADI) at A item 32, answer No at A.

    If you were not an ADI for the income year and have written code 1, 2, 3, 4, 5, 6, 9 or 10 (non-ADI) at A item 32, answer Yes at A and complete the following.

    At B, write the amount of the average value of your assets included in step 1 of the following sections if you have written:

    • code 1 or 9 at A item 32, under section 820-95
    • code 2 or 10 at A item 32, under section 820-100
    • code 3 at A item 32, under section 820-195
    • code 4 at A item 32, under section 820-200
    • code 5 at A item 32, under section 820-205
    • code 6 at A item 32, under section 820-210.

    At C, write the total asset revaluation amount by which your assets have been revalued for thin capitalisation purposes for 2021–22, excluding your financial assets within the meaning of AASB 132 Financial Instruments: Presentation.

    The total asset revaluation amount includes any increases in the value of assets which are recorded at fair value in your accounting records net of subsequent depreciations in 2021–22 (this asset revaluation amount must be included in the amount you write at B item 37), which is an increase in the value of your assets that:

    • gives rise to an increase in the amount of the average value of your assets, for thin capitalisation purposes, as a result of an upward revaluation in 2021–22, and
    • was not reversed in its entirety before or on the next thin capitalisation measurement day following the upward revaluation.

    You would therefore include an upward revaluation that had taken place on 1 October 2021, and which has not been reversed as at the following thin capitalisation measurement day on 31 December 2021, where the 'three measurement days method' is used for 2021–22.

    For example:

    • A non-ADI entity purchased a building on 1 July 2021 for $20 million. On 30 June 2022 the taxpayer revalued the building to its current fair value of $25 million and this has been included in the amount shown by the entity. The entity includes the increase of $5 million in the amount it shows at C item 37.
    • Any increase in the fair value of a mining entity’s mining rights since 2020–21 as shown in its accounting records for mining rights recorded at fair value should be included in the amount shown by the entity at C item 37.

    An increase in the value of mining rights as a result of an upward revaluation must not be netted off against a decrease in the value of any other assets as a result of downward revaluation. For example, if there was an increase of $18 million in the value of your mining rights as a result of an upward revaluation and a decrease of $15 million in the value of your other assets such as land and buildings as a result of downward revaluations, you show a total asset revaluation amount of $18 million at C item 37 (not $3 million).

    At D, if you have written:

    • code 1, 2, 9 or 10 at A item 32, write your safe harbour debt amount determined under section 820-95 (code 1 or 9) or section 820-100 (code 2 or 10). If you have calculated a safe harbour debt amount and relied on the arm’s length method or world-wide gearing method, write the amount you calculated for the safe harbour debt amount at D, otherwise leave this blank.
    • code 3, 4, 5, or 6 at A item 32, write your safe harbour debt amount determined under section 820-195 (code 3), section 820-200 (code 4), section 820-205 (code 5), or section 820-210 (code 6). If you have calculated a safe harbour debt amount and relied on the arm’s length method or world-wide gearing method write the amount you calculated for the safe harbour debt amount at D, otherwise leave this blank.

    At E, write the amount by which your adjusted average debt written at D item 35 exceeds your maximum allowable debt determined under section 820-90 (codes 1, 2, 9 and 10) or section 820-190 (codes 3, 4, 5 and 6).

    At F, write the amount of the average value of your non-debt liabilities, as defined in subsection 995-1(1), which you must subtract in determining your safe harbour debt amount as follows if you have written:

    • code 1 or 9 at A item 32, subtracted in step 6 of section 820-95
    • code 2 or 10 at A item 32, subtracted in step 6 of subsection 820-100(2)
    • code 3 at A item 32, subtracted in step 4 of section 820-195
    • code 4 at A item 32, subtracted in step 4 of subsection 820-200(2)
    • code 5 at A item 32, subtracted in step 4 of section 820-205
    • code 6 at A item 32, subtracted in step 4 of subsection 820-210(2).

    At G, write the amount of the average value of your associate entity debt, within the meaning of section 820-910, which you must subtract in working out your safe harbour debt amount if you have written the following codes. Note that the associate entity threshold relating to associate entity debt for trusts and partnerships has changed.

    • code 1 or 9 at A item 32, subtracted in step 2 of section 820-95
    • code 2 or 10 at A item 32, subtracted in step 2 of subsection 820-100(2)
    • code 3 at A item 32, subtracted in step 2 of section 820-195
    • code 4 at A item 32, subtracted in step 2 of subsection 820-200(2)
    • code 5 at A item 32, subtracted in step 2 of section 820-205
    • code 6 at A item 32, subtracted in step 2 of subsection 820-210(2).

    At H, write the amount of the average value of your associate entity equity, within the meaning of section 820-915, which you must subtract in working out your safe harbour debt amount if you have written the following codes. Note that the associate entity threshold relating to associate entity debt for trusts and partnerships has changed.

    • code 1 or 9 at A item 32, subtracted in step 3 of section 820-95
    • code 2 or 10 at A item 32, subtracted in step 3 of subsection 820-100(2)
    • code 3 at A item 32, subtracted in step 3 of section 820-195
    • code 4 at A item 32, subtracted in step 3 of subsection 820-200(2)
    • code 5 at A item 32, subtracted in step 3 of section 820-205
    • code 6 at A item 32, subtracted in step 3 of subsection 820-210(2).

    At I, write the amount of the average value of your associate entity excess amount, within the meaning of section 820-920, which you must add in working out your safe harbour debt amount if you have written the following codes. Note that the associate entity threshold relating to associate entity debt for trusts and partnerships has changed.

    • code 1 or 9 at A item 32, added in step 8 of section 820-95
    • code 2 or 10 at A item 32, added in step 10 of subsection 820-100(2)
    • code 3 at A item 32, added in step 6 of section 820-195
    • code 4 at A item 32, added in step 8 of subsection 820-200(2)
    • code 5 at A item 32, added in step 6 of section 820-205
    • code 6 at A item 32, added in step 8 of subsection 820-210(2).

    At J, write the amount of the average value of your excluded equity interests, within the meaning of section 820-946, which you must subtract in working out your safe harbour debt amount as follows if you have written:

    • code 1 or 9 at A item 32, subtracted in step 1A of section 820-95
    • code 2 or 10 at A item 32, subtracted in step 1A of subsection 820-100(2)
    • code 3 at A item 32, subtracted in step 1A of section 820-195
    • code 4 at A item 32, subtracted in step 1A of subsection 820-200(2)
    • code 5 at A item 32, subtracted in step 1A of section 820-205
    • code 6 at A item 32, subtracted in step 1A of subsection 820-210(2).

    If you have written code 2, 4, 6 or 10 (financial) at A item 32, then at K write the average value of your zero capital amount, within the meaning of section 820-942, which you must subtract in working out your safe harbour debt amount as follows if you have written:

    • code 2 or 10 at A item 32, subtracted in step 7 of subsection 820-100(2)
    • code 4 at A item 32, subtracted in step 5 of subsection 820-200(2)
    • code 6 at A item 32, subtracted in step 5 of subsection 820-210(2).

    If you have written code 2, 4, 6 or 10 (financial) at A item 32, then at L write the average value of your on-lent amount, as defined in subsection 995-1(1), which you must subtract in working out your safe harbour debt amount as follows if you have written:

    • code 2 or 10 at A item 32, subtracted in step 6 of subsection 820-100(3)
    • code 4 at A item 32, subtracted in step 4 of subsection 820-200(3)
    • code 6 at A item 32, subtracted in step 4 of subsection 820-210(3).

    If you have written code 1,2, 9 or 10 at A item 32, then at M write the average value of all your controlled foreign entity equity, within the meaning of section 820-890, which you must subtract in working out your safe harbour debt amount as follows if you have written:

    • code 1 or 9 at A item 32, subtracted in step 5 of subsection 820-95
    • code 2 or 10 at A item 32, subtracted in step 5 of subsection 820-100(2).

    If you have written code 1, 2, 9 or 10 at A item 32, then at N write the average value of all your controlled foreign entity debt, within the meaning of section 820-885, which you must subtract in working out your safe harbour debt amount as follows if you have written:

    • code 1 or 9 at A item 32, subtracted in step 4 of subsection 820-95
    • code 2 or 10 at A item 32, subtracted in step 4 of subsection 820-100(2).

    Question 38 Arm's length tests

    Did you rely on an arm's length debt or capital amount calculated under Division 820 of the ITAA 1997?

    No

    Go to Question 39.

    Yes

    Answer Yes at A and read on.

    Write at B the arm's length debt amount or the arm's length capital amount determined under the following section.

    Arm's length debt or capital amount provision

    Code you wrote at A item 32

    Section

    1, 2, 9 or 10

    820-105

    3, 4, 5 or 6

    820-215

    7

    820-315

    8

    820-410

    Question 39 Worldwide gearing debt/capital tests

    This question requires information if you have relied on the worldwide gearing debt and capital amount.

    If you have written code 8 at A item 32, you do not need to complete this question. Go to Question 40.

    You must answer Yes at A item 39 and complete all the applicable sub-items at item 39 if at A item 32 you wrote:

    • code 1 or 2 (outward investor (non-ADI)) at A item 32 and you rely on the worldwide gearing debt amount as calculated in subsection 820-110(1) or subsection 820-110(2)
    • code 3, 4, 5 or 6 (inward investing entities (non-ADI)) at A item 32 and you rely on the worldwide gearing debt amount as calculated in section 820-216, section 820-217, section 820-218 or section 820-219
    • code 7 (outward investing entity (ADI)) at A item 32 and you rely on the worldwide capital amount as calculated in section 820-320
    • code 9 or 10 (inward investment vehicle and is also outward investor (non-ADI)) at A item 32 and you rely on the worldwide gearing debt amount as calculated in subsection 820-111(1) or subsection 820-111(2).

    If you relied on worldwide gearing debt and capital tests, answer Yes at A item 39 and complete the relevant sub-items.

    If you wrote code 7 (outward investing entity (ADI)) at A item 32 write:

    • at B, the worldwide group capital ratio worked out in accordance with subsection 820-320(3). (For example, if the amount worked out under step 1 of the method statement in subsection 820-320(3) is 5.42% of the amount worked out under step 2, the decimal number you write at B is 0.05420.)
    • at C, your worldwide capital amount worked out under subsection 820-320(2).

    If you wrote code 1 or 2 (outward investor (non-ADI)) at A item 32 write:

    • at D, the amount of your worldwide debt, as defined in subsection 995-1(1), used to calculate the result of step 1 in the following subsections if you wrote  
      • code 1 at A item 32, step 1 in subsection 820-110(1)
      • code 2 at A item 32, step 1 in subsection 820-110(2)
    • at E, the amount of your worldwide equity, as defined in subsection 995-1(1), used to calculate the result of step 1 in the following subsections if you wrote  
      • code 1 at A item 32, step 1 in subsection 820-110(1)
      • code 2 at A item 32, step 1 in subsection 820-110(2)
    • at F, your worldwide gearing debt amount worked out under the following subsections if you wrote  
      • code 1 at A item 32, under subsection 820-110(1)
      • code 2 at A item 32, under subsection 820-110(2).

    If you wrote code 3, 4, 5 or 6 (inward investing entity (non-ADI)), or code 9 or 10 (inward investment vehicle which is also an outward investor (non-ADI)) at A item 32 write:

    • at D, the amount of your statement worldwide debt, as defined in subsection 995-1(1), used to calculate the result of step 1 in the following sections if you wrote  
      • code 3 at A item 32, step 1 in section 820-216
      • code 4 at A item 32, step 1 in section 820-217
      • code 5 at A item 32, step 1 in section 820-218
      • code 6 at A item 32, step 1 in section 820-219
      • code 9 at A item 32, step 1 in subsection 820-111(1)
      • code 10 at A item 32, step 1 in subsection 820-111(2)
    • at E, the amount of your statement worldwide equity, as defined in subsection 995-1(1), used to calculate the result of step 1 in the following sections if you wrote  
      • code 3 at A item 32, step 1 in section 820-216
      • code 4 at A item 32, step 1 in section 820-217
      • code 5 at A item 32, step 1 in section 820-218
      • code 6 at A item 32, step 1 in section 820-219
      • code 9 at A item 32, step 1 in subsection 820-111(1)
      • code 10 at A item 32, step 1 in subsection 820-111(2)
    • at F, your worldwide gearing debt amount worked out under the following sections if you wrote  
      • code 3 at A item 32, under section 820-216
      • code 4 at A item 32, under section 820-217
      • code 5 at A item 32, under section 820-218
      • code 6 at A item 32, under section 820-219
      • code 9 at A item 32, under subsection 820-111(1)
      • code 10 at A item 32, under subsection 820-111(2)
    • at G, the amount of your statement worldwide assets, as defined in subsection 995-1(1), for the purpose of applying subsection 820-90(3) if you wrote  
      • code 3 at A item 32, and have applied section 820-216
      • code 4 at A item 32, and have applied section 820-217
      • code 5 at A item 32, and have applied section 820-218
      • code 6 at A item 32, and have applied section 820-219
      • code 9 at A item 32, and have applied subsection 820-111(1)
      • code 10 at A item 32, and have applied subsection 820-111(2)
    • at H, the amount of your average Australian assets, as defined in subsection 995-1(1), for the purpose of applying subsection 820-90(3) if you wrote  
      • code 3 at A item 32, and have applied section 820-216
      • code 4 at A item 32, and have applied section 820-217
      • code 5 at A item 32, and have applied section 820-218
      • code 6 at A item 32, and have applied section 820-219
      • code 9 at A item 32, and have applied subsection 820-111(1)
      • code 10 at A item 32, and have applied subsection 820-111(2).
    Last modified: 05 Sep 2022QC 68003