Appendix 3: Thin capitalisation
This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.
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The thin capitalisation provisions reduce certain expenditure (called 'debt deductions') incurred in obtaining and servicing debt where the debt used to finance the Australian operations of a trust exceeds the limits set out in Division 820 of the ITAA 1997. These rules ensure that taxpayers fund their Australian operations with an appropriate amount of equity.
Do the thin capitalisation rules apply?
Subject to two exclusions listed below, the thin capitalisation rules will apply to a trust if the trust is:
- an Australian trust as defined in section 338 of the ITAA 1936, and either:
- the trust, or any of its associate entities, is an Australian controller of an Australian controlled foreign entity (explained below) or carries on business overseas at or through a permanent establishment, or
- the trust is foreign controlled, either directly or indirectly, or
- a foreign resident and carries on business in Australia at or through a permanent establishment or otherwise has assets that produce assessable income.
The thin capitalisation rules will not apply if:
- the trust's debt deductions (combined with the debt deductions of its associate entities) do not exceed $250,000 in the income year, or
- in the case of an Australian trust which is not foreign controlled, the combined value of the trust's Australian assets and the Australian assets of its associates comprise at least 90% of the value of the total assets of the trust and those associates.
The rules measuring control take into account both direct and indirect interests that the trust holds in the other entity (or vice-versa), and the direct and indirect interests that associate entities of the trust hold in the other entity. This means an Australian trust can be an Australian controller of a foreign entity even if it holds a direct interest of less than 50% in the foreign entity. Additionally, an Australian trust is foreign controlled where a foreign entity is in a position to control the trust.
What if the thin capitalisation rules apply?
If the thin capitalisation rules apply to the trust or further information is required, see the Guide to thin capitalisation. If the thin capitalisation rules apply, the trust must complete the Thin capitalisation schedule 2011 or the International dealings schedule - financial services 2011, unless the trust was a subsidiary member of a consolidated group for the entire income year.
Where the trust is a member of a consolidated group for the whole income year and the thin capitalisation rules apply the responsibility for preparing the schedule will rest on the head company of the consolidated group.
Where a return is required because the trust had a period in the income year when it was not a member of a consolidated group (a non-membership period) the trust should complete a Thin capitalisation schedule 2011 where the thin cap rules apply during the non-membership period.
Post the completed International dealings schedule - financial services to:
Australian Taxation Office
PO Box 3008
PENRITH NSW 2740
What if the thin capitalisation rules are breached?
If the thin capitalisation rules are breached, some of the trust's debt deductions may be denied. The amount denied for business income is shown in B Expense reconciliation adjustments item 5. If the trust incurred debt deductions for other types of income (for example, rental income, dividend income or foreign income) the amount of deductions shown at the relevant entries must exclude the debt deductions denied.
Last modified: 13 Aug 2014QC 24223