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On 8 April 2024, the Treasury Law Amendment (Making Multinationals Pay Their Fair Share - Integrity and Transparency) Act 2024 was enacted. The amendments apply to assessments for income years commencing on or after 1 July 2023, with the exception of new integrity rules (debt deduction creation rules) which apply in relation to assessments for income years starting on or after 1 July 2024. Under the new thin capitalisation rules:
ADIs, securitisation vehicles and certain special purpose entities are excluded from the debt deduction creation rules. Entities that are Australian plantation forestry entities are excluded from the new rules. For these entities, the previous rules will continue to apply. |
Calculating if you meet the thin capitalisation rules
The six steps a non-ADI financial outward investor takes to calculate if they have met the thin capitalisation rules are:
- Step 1: Calculate the adjusted average debt
- Steps 2 and 3: Calculate the safe harbour debt amount
- Step 4: Calculate the worldwide gearing debt amount
- Step 5: Calculate the arm's length debt amount
- Step 6: Calculate the debt deductions disallowed.
This worked example goes through each of these steps.
See also
Worked example
Aust Fin is a financial entity. It has a wholly-owned foreign subsidiary (For Sub) and a wholly-owned Australian subsidiary (Ozzie Co) that is a general entity. Aust Fin has borrowed $5 million from its Australian parent and $19 million from unrelated financial institutions and has $3 million of non-debt. It has lent $23 million to unrelated third parties, $3 million of which is a 0% risk-weighted loan. Aust Fin has invested $7 million equity in For Sub and $1 million in Ozzie Co. The $1 million equity investment in Ozzie Co represents what Aust Fin paid a third party for 100% of the equity. For Sub has borrowed $3 million from an unrelated financial institution and has $2 million in retained earnings.
Aust Parent Co, Aust Fin and Ozzie Co have not formed a consolidated group for tax purposes.
None of the Australian companies have any overseas permanent establishments. All loans are at commercial interest rates.
For the purposes of this example, Aust Fin is the only entity being tested under the thin capitalisation rules. The test year is the 2014–15 income year.
Diagram: Financial information for Aust Fin and Ozzie Co
Aust Fin's assets and liabilities for year ending 30 June 2015 – average values using opening and closing balances method
|
Assets |
$m |
Liabilities |
$m |
|---|---|---|---|
|
Loans |
20 |
Loans |
24 |
|
Low risk-weighted loan |
3 |
Non-debt liabilities |
3 |
|
Equity in Ozzie Co* |
1 |
Share capital |
8 |
|
Equity in For Sub |
7 |
- |
- |
|
Other assets |
4 |
- |
- |
|
- |
35 |
- |
35 |
* Assume the equity investment in Ozzie Co remains valued at $1 million at all times throughout the income year.
As Aust Fin has $2.7 million worth of debt deductions in the 2014–15 income year, it fails the 'debt deduction de-minimus' test. Assume it also fails the 'asset de-minimus' test and is not exempt under section 820-39 – (this section exempts certain special purpose vehicles).
Ozzie Co's assets and liabilities at 1 July 2014
|
Assets |
$m |
Liabilities |
$m |
|---|---|---|---|
|
Non-current |
0.9 |
Share capital |
0.85 |
|
- |
- |
Retained earnings |
0.05 |
|
- |
0.9 |
- |
0.9 |
Ozzie Co's assets and liabilities at 30 June 2015
|
Assets |
$m |
Liabilities |
$m |
|---|---|---|---|
|
Non-current |
0.95 |
Share capital |
0.85 |
|
- |
- |
Retained earnings |
0.1 |
|
- |
0.95 |
- |
0.95 |
Step 1: Calculate Aust Fin's adjusted average debt
Worksheet 1: Aust Fin's step 1
|
Steps |
$m |
||
|---|---|---|---|
|
Step 1.1: The average value of all the debt capital of Aust Fin that gives rise to debt deductions is $24m |
Average debt capital |
(A) |
24 |
|
Step 1.2: Aust Fin has not lent any debt to its associate entities and does not have any associate entity debt |
Average associate entity debt |
(B) |
0 |
|
Step 1.3: Aust Fin does not have any controlled foreign entity debt |
Average controlled foreign entity debt |
(C) |
0 |
|
Step 1.4: Aust Fin does not have any borrowed securities amount |
Borrowed securities amount |
(D) |
0 |
|
Step 1.5: All Aust Fin's debt capital gives rise to debt deductions |
Average cost-free debt capital |
(E) |
0 |
|
Step 1.6 Aust Fin's adjusted average debt is $24 million |
Adjusted average debt (A – B – C + D + E) |
= |
24 |
Aust Fin's adjusted average debt is $24 million. This is now compared to Aust Fin's maximum allowable debt, which is the greatest of its:
- safe harbour debt amount, which is the lesser of the total debt amount and the adjusted on-lent amount
- worldwide gearing debt amount
- arm's length debt amount.
Aust Fin can calculate the amounts in any order it chooses and does not necessarily have to calculate all three amounts.
Step 2: Calculate Aust Fin's total debt amount
Worksheet 2: Aust Fin's step 2
|
Steps |
$m |
||
|---|---|---|---|
|
Step 2.1: The average value of Aust Fin's assets is $35m |
Average assets |
(F) |
35 |
|
Step 2.2: None of the equity interests issued by Aust Fin are excluded equity interests |
Average excluded equity interests |
(XX) |
0 |
|
Step 2.3: Aust Fin has not lent any debt to its associate entities and does not have any associate entity debt |
Average associate entity debt (from B in worksheet 1) |
(B) |
0 |
|
Step 2.4: The average value of Aust Fin's associate entity equity is $1m. The equity invested in For Sub is not included in associate entity debt because it is not attributable to For Sub's Australian permanent establishments or other assets held by For Sub for the purpose of producing Australian assessable income |
Average associate entity equity |
(G) |
1 |
|
Step 2.5: Aust Fin has not lent any amounts to For Sub and so does not have any controlled foreign entity debt |
Average controlled foreign entity debt from C in worksheet 1 |
(C) |
0 |
|
Step 2.6: The average value of Aust Fin's controlled foreign entity equity is the $7m invested in For Sub |
Average controlled foreign entity equity |
(H) |
7 |
|
Step 2.7: The average value of Aust Fin's non-debt liabilities is $3m |
Average non-debt liabilities |
(J) |
3 |
|
Step 2.8: The only zero-capital amount Aust Fin has is the low-risk weighted loan to the unrelated company so the average value of Aust Fin's zero-capital amount is $3m |
Average zero-capital amount |
(ZC) |
3 |
|
Step 2.9: Reduce Aust Fin's average assets by the amounts at XX, B, G, C, H, J & ZC |
F − XX − B – G – C – H – J – ZC |
(K) |
21 |
|
Step 2.10: Multiply the result at K by 15/16 |
K 15/16 |
(L) |
19.6875 |
|
Step 2.11: The average value of Aust Fin's zero-capital amount is $3m, as established in step 2.7 |
Average zero-capital amount |
(ZC) |
3 |
|
Step 2.12: The average value of Aust Fin's associate entity excess amount is $625,312 – see worksheet 2A |
Average associate entity excess amount (from M on worksheet 2A) |
(M) |
0.625312 |
|
Step 2.13: Aust Fin's total debt amount is calculated by adding the amounts at L, ZC and M |
Total debt amount |
= |
$23,312,812 |
Step 2A: Calculate Aust Fin's average associate entity excess amount for the total debt amount
Aust Fin's associate entity excess amount is calculated on each of its measurement days. Aust Fin uses the opening and closing balances method so its measurement days are 1 July 2014 (the first day of the period) and 30 June 2015 (the last day of the period).
Worksheet 2A: Aust Fin's step 2A
|
Steps |
1 July 2014 $m |
30 June 2015 $m |
||
|---|---|---|---|---|
|
Step 2A.1: The value of Aust Fin's associate entity equity on both measurement days is the $1m invested in Ozzie Co |
Aust Fin's associate entity equity on a measurement day |
(N) |
1 |
1 |
|
Step 2A.2: The value of Ozzie Co's equity capital attributable to Aust Fin's equity interests in Ozzie Co is $900,000 on 1 July and $950,000 on 30 June |
Ozzie Co's equity capital attributable to Aust Fin's equity interests on a measurement day |
(P) |
0.9 |
0.95 |
|
Step 2A.3: Aust Fin's premium excess amount is calculated by taking P from N and multiplying the result by 15/16 |
(N – P) 15/16 |
(Q) |
0.09375 |
0.046875 |
|
Step 2A.4: Ozzie Co's safe harbour debt amount on a measurement day is its assets multiplied by 3/5 |
Ozzie Co's safe harbour debt amount on a measurement day |
(R) |
0.54 |
0.57 |
|
Step 2A.5: Ozzie Co does not have any debt capital so its adjusted average debt on both measurement days is $0 |
Ozzie Co's adjusted average debt on a measurement day |
(S) |
0 |
0 |
|
Step 2A.6: Ozzie Co's excess borrowing capacity is calculated by reducing its safe harbour by its adjusted average debt |
R – S |
(T) |
0.54 |
0.57 |
|
Step 2A.7: The value of Ozzie Co's equity capital attributable to Aust Fin is the same as P |
Ozzie Co's equity capital attributable to Aust Fin on a measurement day |
(U) |
0.9 |
0.95 |
|
Step 2A.8: Ozzie Co's total equity capital is the same as U because Aust Fin owns Ozzie Co 100% |
Value of Ozzie Co's total equity capital on a measurement day |
(V) |
0.9 |
0.95 |
|
Step 2A.9: The proportion of Ozzie Co's equity capital held by Aust Fin on both days is 100% |
U V |
(W) |
1 |
1 |
|
Step 2A.10: The attributable safe harbour excess amount is the proportion of equity capital (100%) held by Aust Fin multiplied by Ozzie Co's excess borrowing capacity |
T W |
(X) |
0.54 |
0.57 |
|
Step 2A.11: The associate entity excess amount on a measurement day is the sum of the premium excess amount and the attributable safe harbour excess amount |
Q + X |
(Y) |
0.63375 |
0.616875 |
|
Step 2A.12: Aust Fin has only one associate entity so Z is the same as Y |
Transfer from Y |
(Z) |
0.633750 |
0.616875 |
|
Step 2A.13:Z is calculated on the other measurement day. This has been done in the far right-hand column |
- |
- |
- |
- |
|
Step 2A.14: The average associate entity excess amount is calculated by adding the results at Z ($633,750 and $616,875) and dividing by 2 – the number of measurement days |
($633,750 + $616,875)/2 |
(M) $625,312 Transfer to M on worksheet 2 |
||
Aust Fin's total debt amount is $23,312,812. It must now calculate its adjusted on-lent amount. The lesser of these two amounts is its safe harbour debt amount.
Step 3: Calculate Aust Fin's adjusted on-lent amount
Worksheet 3: Aust Fin's step 3
|
Steps |
$m |
||
|---|---|---|---|
|
Step 3.1: The average value of Aust Fin's assets is $35m |
Average assets from F on worksheet 2 |
(F) |
35 |
|
Step 3.2: None of the equity interests issued by Aust Fin are excluded equity interests |
Average excluded equity interests |
(XX) |
0 |
|
Step 3.3: The average value of Aust Fin's associate entity equity is $1m – see step 2.4 |
Average associate entity equity from G on worksheet 2 |
(G) |
1 |
|
Step 3.4: Aust Fin has not lent any amounts to For Sub so its controlled foreign entity debt is $0 |
Average controlled foreign entity debt from C on worksheet 1 |
(C) |
0 |
|
Step 3.5: The average value of Aust Fin's controlled foreign entity equity is the $7m invested in For Sub |
Average controlled foreign entity equity from H on worksheet 2 |
(H) |
7 |
|
Step 3.6: The average value of Aust Fin's non-debt liabilities is $3m |
Average non-debt liabilities from J on worksheet 2 |
(J) |
3 |
|
Step 3.7: The average value of Aust Fin's on-lent amount is $23m – the $20m lent to unrelated third parties and the $3m low-risk weighted loan |
Average on-lent amount |
(OA) |
23 |
|
Step 3.8: Reduce Aust Fin's assets by the amounts at XX, G, C, H, J & OA |
F − XX – G – C – H – J – OA |
(AA) |
1 |
|
Step 3.9: Multiply the result at AA by 3/5 |
AA 3/5 |
(BB) |
0.6 |
|
Step 3.10: The average value of Aust Fin's on-lent amount is $23m, as calculated in step 3.7 |
Average on-lent amount |
(OA) |
23 |
|
Step 3.11: The average value of Aust Fin's associate entity debt is $0 |
Average associate entity debt from B on worksheet 1 |
(B) |
0 |
|
Step 3.12: The average value of Aust Fin's associate entity excess is $600,000 – see worksheet 3A |
Average associate entity excess from CC on worksheet 3A |
(CC) |
0.6 |
|
Step 3.13: Aust Fin's adjusted on-lent amount is calculated by adding the amounts at BB, OA and CC and reducing the result by the amount at B |
Adjusted on-lent amount; that is, BB + OA − B + CC |
= |
24.2 |
Step 3A: Calculate Aust Fin's average associate entity excess amount for the adjusted on-lent amount
Worksheet 3A: Aust Fin's step 3A
|
Steps |
1 July 2014 $m |
30 June 2015 $m |
||
|---|---|---|---|---|
|
Step 3A.1: The value of Aust Fin's associate entity equity on both measurement days is the $1m invested in Ozzie Co |
Aust Fin's associate entity equity on a measurement day |
(N) |
1 |
1 |
|
Step 3A.2: Calculate the value of Ozzie Co's equity capital attributable to Aust Fin's equity interests in Ozzie Co is $900,000 on 1 July and $950,000 on 30 June |
Ozzie Co's equity capital attributable to Aust Fin's equity interests on a measurement day |
(P) |
0.9 |
0.95 |
|
Step 3A.3: Aust Fin's premium excess amount is calculated by reducing the amount at N by the amount at P and multiplying the result by 3/5 |
(N – P) 3/5 |
(DD) |
0.06 |
0.03 |
|
Step 3A.4: The attributable safe harbour excess amount has already been calculated at X in worksheet 2A |
Attributable safe harbour excess amount from X on worksheet 2A |
(X) |
0.54 |
0.57 |
|
Step 3A.5: The associate entity excess amount is the sum of the premium excess amount and the attributable safe harbour excess amount |
DD + X |
(EE) |
0.6 |
0.6 |
|
Step 3A.6: Aust Fin has only one associate entity so FF is the same as EE |
Transfer from EE |
(FF) |
0.6 |
0.6 |
|
Step 3A.7: FF is calculated on Aust Fin's each other measurement day. This has been done in the right-hand column |
- |
- |
- |
- |
|
Step 3A.8: the average associate entity excess amount is calculated by adding results at FF ($600 000 and $600 000) and dividing by 2 – the number of measurement days |
(0.6 + 0.6)/ 2 |
(CC) |
|
0.6 Transfer to CC on worksheet 3 |
As Aust Fin's total debt amount is the lesser of the two amounts, the total debt amount is the safe harbour debt amount; that is, $23,312,812. Aust Fin's adjusted average debt ($24 million) is more than this amount. Aust Fin can calculate an alternative amount under either the worldwide gearing debt test or the arm's length debt test, though neither amount may be higher than the safe harbour debt amount. It can also choose to use the safe harbour debt amount as its maximum allowable debt.
Step 4: Calculate Aust Fin's worldwide gearing debt amount
Aust Fin is not foreign controlled so the method statement contained in section 820-111(2) is used to calculate its worldwide gearing debt amount.
Worksheet 4: Aust Fin's step 4
|
Steps |
|||
|
Step 4.1: Aust Fin's worldwide debt is $27m; that is, $24m owed by Aust Fin to third parties and $3m owed by For Sub to a third party |
Worldwide debt |
(GG) |
$27m |
|
Step 4.2: Aust Fin's worldwide equity is $10m; that is, $8m equity interest held in Aust Fin and $2m retained earnings in For Sub. The $7m equity invested in For Sub by Aust Fin is excluded because amounts lent to entities within the worldwide group are disregarded |
Worldwide equity |
(HH) |
$10m |
|
Step 4.3: Aust Fin's worldwide gearing ratio is calculated by dividing the worldwide debt by the worldwide equity |
GG HH |
(JJ) |
$2.7m |
|
Step 4.4: Insert the amount of JJ at KK |
JJ |
(KK) |
2.7 |
|
Step 4.5: Add 1 (one) to the amount at KK |
KK + 1 |
(LL) |
3.7 |
|
Step 4.6: Divide the amount at KK by the amount at LL |
KK LL |
(MM) |
0.7297297 |
|
Step 4.7: The gearing ratio is applied to Aust Fin's net assets as calculated at K in worksheet 2 |
0.729729 $21m |
(NN) |
$15,324,309 |
|
Step 4.8: Aust Fin's zero capital amount has already been worked out at ZC on worksheet 2 |
Average zero-capital |
(ZC) |
$3m |
|
Step 4.9: The average value of Aust Fin's associate entity excess amount is $609,608 – see worksheet 4A |
Average associate entity excess amount |
(PP) |
$609,608 |
|
Step 4.10: Aust Fin's worldwide gearing debt amount is calculated by adding the amounts at NN, ZC and PP |
Worldwide gearing debt amount |
= |
$18,933,917 |
Step 4A: Calculate Aust Fin's average associate entity excess for the worldwide gearing debt amount
Worksheet 4A: Aust Fin's step 4A
|
Steps
|
1 July 2014 $m |
30 June 2015 $m |
||
|---|---|---|---|---|
|
Step 4A.1: The value of Aust Fin's associate entity equity on both measurement days is the $1m invested in Ozzie Co |
Aust Fin's associate entity equity on a measurement day |
(N) |
1 |
1 |
|
Step 4A.2: The value of Ozzie Co's equity capital attributable to Aust Co's equity interests in Ozzie Co is $900,000 on 1 July and $950,000 on 30 June |
Ozzie Co's equity capital attributable to Aust Fin's equity interests on a measurement day |
(P) |
0.9 |
0.95 |
|
Step 4A.3: Aust Fin's premium excess amount is calculated by reducing the amount at N by the amount at P and multiplying the result by the uplifted worldwide gearing ratio worked out at MM on worksheet 4 |
(N – P) MM |
(QQ) |
0.0729729 |
0.0364864 |
|
Step 4A.4: The attributable safe harbour excess amount has been calculated at X on worksheet 2A |
Attributable safe harbour excess amount (from X on worksheet 2A) |
(X) |
0.54 |
0.57 |
|
Step 4A.5: The associate entity excess amount is the sum of the premium excess amount and the attributable safe harbour excess amount |
QQ + X |
(RR) |
0.6129729 |
0.606486 |
|
Step 4A.6: Aust Fin has only one associate entity so SS if the same as RR |
Transfer from RR |
(SS) |
0.6129729 |
0.606486 |
|
Step 4A.7: SS is calculated for the other measurement day. This has been done in the right-hand column |
- |
- |
- |
- |
|
Step 4A.8: The average associate entity excess amount is calculated by adding the results at SS ($612,729 and $606,486) and dividing by 2 – the number of measurement days |
($612 729 + $606 486)/2 |
(PP) |
$609,608 Transfer to PP on worksheet 4A |
|
Aust Fin's worldwide gearing debt amount is $18,933,917. This is less than its safe harbour debt amount. Aust Fin can calculate an alternative amount under the arm's length debt test. Aust Fin could also choose to not calculate an arm's length debt amount (as this may be less than the safe harbour debt amount as well) and calculate what debt deductions are disallowed on the basis that the safe harbour debt amount is its maximum allowable debt.
Step 5: Calculate the arm's length debt amount
For the purposes of this exercise, assume Aust Fin chooses not to calculate an arm's length debt amount.
See also
- Taxation ruling TR 2003/1
Step 6: Calculate debt deductions disallowed
Aust Fin's maximum allowable debt is $23 312 812– the safe harbour debt amount, being the greatest of the three amounts. As Aust Fin's adjusted debt ($24 million) is more than its maximum allowable debt, a proportion of its debt deductions will be disallowed.
Aust Fin's debt deductions are $2.7 million.
Worksheet 6: Aust Fin's step 6
|
Steps |
|||
|---|---|---|---|
|
Step 6.1: Aust Fin's adjusted average debt is $24m and its maximum allowable debt is $23,312,812 |
Excess debt |
(TT) |
$687,188 |
|
Step 6.2: Aust Fin's average debt is $24m |
Average debt |
(UU) |
$24m |
|
Step 6.3: Divide the amount at TT by the amount at UU to get the proportion to be applied to Aust Fin's debt deductions |
TT / UU |
(VV) |
0.0286328 |
|
Step 6.4: Aust Fin's debt deductions for the income year are $2.7m |
Debt deductions for the income year |
(WW) |
$2.7m |
|
Step 6.5: The amount of debt deductions disallowed is calculated by multiplying the amount at VV by the amount at WW |
VV x WW |
= |
$77,308 |
Aust Fin cannot deduct $77,308 of its debt deductions.