• Step 5: Calculate the debt deductions disallowed

    The ADI's minimum capital amount is the least of the:

    • safe harbour capital amount from step 2
    • worldwide capital amount from step 3
    • arm's length capital amount from step 4.

    You do not necessarily have to calculate all three amounts. For example, you can use the safe harbour capital amount as the minimum capital amount if you do not want to calculate either a worldwide capital amount or an arm's length capital amount.

    If the ADI's adjusted average equity capital is less than its minimum capital amount, a proportion of its debt deductions cannot be deducted. Table 53: ADI outward investing entity's step 5 and Worksheet 45: ADI outward investing entity's step 5 work out the proportion disallowed.

    See also:

    Table 53: ADI outward investing entity's step 5

    Steps

    Comments

    Step 5.1: Calculate the amount by which the ADI's adjusted average equity capital is less than its minimum capital amount – the capital shortfall

    Insert this amount at L on Worksheet 45: ADI outward investing entity's step 5

    The proportion of debt deductions disallowed depends on the amount by which the ADI's adjusted average equity capital from step 1 is less than its minimum capital amount

    Step 5.2: Calculate the ADI's average debt

    Insert this amount at M on Worksheet 45: ADI outward investing entity's step 5

    The average value for the income year, of the ADI's debt capital that gives rise to debt deductions in that year or any other income year. However, it does not include debt capital attributable to any of the ADI's overseas permanent establishments

    Step 5.3: Divide the amount at L by the amount at M

    Insert the result at N on Worksheet 45: ADI outward investing entity's step 5

    This step works out what proportion to apply to the ADI's debt deductions to calculate the amount disallowed

    Step 5.4: Calculate the ADI's debt deductions for the income year

    Insert this amount at P on Worksheet 45: ADI outward investing entity's step 5

    The calculation is applied to all the ADI's debt deductions for the year. Do not include any debt deductions attributable to any of the ADI's overseas permanent establishments

    Step 5.5: Multiply the amount(s) at N by the amount at P. This is the amount of debt deductions disallowed

    This calculates the amount of debt deduction disallowed. The debt deductions that would be allowed, but for thin capitalisation, are each reduced proportionately

    Worksheet 45: ADI outward investing entity's step 5

    Steps

    $

    Step 5.1: Capital shortfall (minimum capital amount – adjusted average equity capital)

    (L) _____________

    Step 5.2: Average debt

    (M) _____________

    Step 5.3: LM

    (N) _____________

    Step 5.4: Debt deductions for the income year.

    (P) _____________

    Step 5.5: N x P. This is the total debt deductions disallowed

    = _______________

    This is the amount of debt deductions the ADI outward investing entity is not allowed to deduct under the thin capitalisation rules.

    See also:

    • Worked example of calculations for an ADI outward investing entity.
    Last modified: 09 Mar 2016QC 48172