Worked example of calculations for a non-ADI general outward investor

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:

• The newly classified ‘general class investors’ will be subject to one of 3 new tests:
  • fixed ratio test
  • group ratio test
  • third party debt test.

• Financial entities will continue to be subject to the existing safe harbour test and worldwide gearing test or may choose the new third party debt test.
• ADIs will continue to be subject to the previous thin capitalisation rules.
• The arm’s length debt test has been removed for all taxpayers.

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.

Loan to For Sub

3

Debt

12

Equity in For Sub

2

Non-debt liabilities

0.5

Equity in Ozzie Co*

1

Share capital

3.5

Building & plant

10

16

16

Non-current assets

0.9

Share capital

0.85

Retained earnings

0.05

0.9

0.9

Non-current assets

0.95

Share capital

0.85

Retained earnings

0.1

0.95

0.95

Step 1.1: The average value of all Aust Co's debt capital that gives rise to debt deductions is $12m

Average debt capital

(A)

12

Step 1.2: Aust Co does not have any associate entity debt. The loan to For Sub is not included 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 debt

(B)

0

Step 1.3: Aust Co's controlled foreign entity debt is the $3m loan to For Sub

Average controlled foreign entity debt

(C)

3

Step 1.4: All of Aust Co's debt capital gives rise to debt deductions

Average cost-free debt capital

(D)

0

Step 1.5: Aust Co's adjusted average debt is $9m

Adjusted average debt
(A – B – C + D)

=

9

Step 2.1: The average value of Aust Co's assets is $16m

Average assets

(E)

16

Step 2.2: None of the equity interests issued by Aust Co are excluded equity interests

Average excluded equity interests

(QQ)

0

Step 2.3: Aust Co does not have any associate entity debt – see step 1.2

Average associate entity debt from B on worksheet 1

(B)

0

Step 2.4: The average value of Aust Co's associate entity equity is $1m. Equity invested in For Sub is not included in associate entity equity 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

(F)

1

Step 2.5: The average value of Aust Co's controlled foreign entity debt is the $3m owed to Aust Co by For Sub

Average controlled foreign entity debt from C on worksheet 1

(C)

3

Step 2.6: The average value of Aust Co's controlled foreign entity equity is the $2m invested in For Sub

Average controlled foreign entity equity

(G)

2

Step 2.7: The average value of Aust Co's non-debt liabilities is $0.5m

Average non-debt liabilities

(H)

0.5

Step 2.8: Reduce Aust Co's average assets by the amounts at QQ, B, F, C, G & H

E − QQ – B – F – C – G – H

(J)

9.5

Step 2.9: Multiply the result at J by 3/5

J x 3/5

(K)

5.7

Step 2.10: The average value of Aust Co's associate entity excess is $600,000 – see worksheet 2A

Average associate entity excess amount from L on worksheet 2A

(L)

0.6

Step 2.11: Aust Co's safe harbour debt amount is calculated by adding the amounts at K and L

Safe harbour debt amount
(K + L)

=

6.3

Step 2A.1: The value of Aust Co's associate entity equity on both measurements days is the $1m invested in Ozzie Co

Aust Co's associate entity equity on a measurement day

(M)

1

1

Step 2A.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 Co's equity interests on a measurement day

(N)

0.9

0.95

Step 2A.3: Aust Co's premium excess amount is calculated by deducted N from M and multiplying the result by 3/5

(M – N)   3/5

(P)

0.06

0.03

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

(Q)

0.54

0.57

Step 2A.5: Ozzie Co does not have any debt capital so its adjusted average debt on both days is $0

Ozzie Co's adjusted average debt on a measurement day

(R)

0

0

Step 2A.6: Ozzie Co's excess borrowing capacity is calculated by reducing its safe harbour debt amount by its adjusted average debt

Q – R

(S)

0.54

0.57

Step 2A.7: The value of Ozzie Co's equity capital attributable to Aust Co is the same as N

Value of Ozzie Co's equity capital and debt deduction free debt attributable to Aust Co on a measurement day

(T)

0.9

0.95

Step 2A.8: Ozzie Co's total equity capital is the same as T because Aust Co owns 100% of Ozzie Co

Ozzie Co's total equity capital and debt deduction free debt on a measurement day

(U)

0.9

0.95

Step 2A.9: The proportion of Ozzie Co's equity capital held by Aust Co is 100% on both days

T   U

(V)

1

1

Step 2A.10: The attributable safe harbour excess amount is the proportion of equity capital held by Aust Co (100%) multiplied by Ozzie Co's excess borrowing capacity

S   V

(W)

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

P + W

(X)

0.6

0.6

Step 2A.12: Aust Co has only one associate entity so Y is the same as X

Transfer from X

(Y)

0.6

0.6

Step 2A.13: Y is calculated for the other measurement day (this has been done in the far right column)

Step 2A.14: The average associate entity excess amount is calculated by adding the results at Y ($600,000 and $600,000) and dividing by two – the number of measurement days

($600,000 + $600,000)/2

(L)

0.6
Transfer to L on worksheet 2

Worksheet 3

Step 3.1: Aust Co's worldwide debt is $17m. $12m is owed by Aust Co to a third party and $5m owed by For Sub to a third party

The $3m loan from Aust Co to For Sub is not included because worldwide debt does not include debt lent from an entity within the worldwide group

Worldwide debt

(Z)

$17m

Step 3.2: Aust Co's worldwide equity is $10.5m; that is. $3.5m equity interests held in Aust Co and the $7m retained earnings in For Sub

The $2m equity invested in For Sub by Aust Co is not included because worldwide equity does not include equity invested from an entity within the worldwide group

Worldwide equity

(AA)

$10.5m

Step 3.3: Aust Co's worldwide gearing ratio is calculated by dividing its worldwide debt by its worldwide equity

Z   AA

(BB)

1.619047

Step 3.4: Insert the amount of BB at CC

BB  

(CC)

1.619047

Step 3.5: Add 1 (one) to the amount at CC

CC + 1

(DD)

2.619047

Step 3.6: Divide the amount at CC by the amount at DD

CC   DD

(EE)

0.618182

Step 3.7: The gearing ratio is applied to Aust Co's net assets as calculated at J on worksheet 2

EE   $9.5m

(FF)

$5,872,729

Step 3.8: The average value of Aust Co's associate entity excess amount is $601,364

Average associate entity excess amount from GG on worksheet 3A

(GG)

$601,364

Step 3.9: Aust Co's worldwide gearing debt amount is calculated by adding the amounts at FF and GG

Worldwide gearing debt amount
FF + GG

$6,474,093

Step 3A.1: The value of Aust Co's associate entity equity on both measurement days is the $1m invested in Ozzie Co

Aust Co's associate entity equity on a measurement day

(M)

1

1

Step 3A.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 Co's equity interests on a measurement day

(N)

0.9

0.95

Step 3A.3: Aust Co's premium excess amount is calculated by deducting N from M and multiplying the result by the worldwide gearing ratio calculated at EE on worksheet 3

(M – N)   EE

(HH)

0.0618182

0.0309091

Step 3A.4: The attributable safe harbour excess amount has been calculated at W on worksheet 2A

Attributable safe harbour excess amount (from W on worksheet 2A)

(W)

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

HH + W

(JJ)

0.601818

0.600909

Step 3A.6: Aust Co has only one associate entity so KK is the same as JJ

Transfer from JJ

(KK)

0.601818

0.600909

Step 3A.7: KK is calculated for the other measurement day. This has been done in the far right column

Step 3A.8: The average associate entity excess amount is calculated by adding the results at KK ($601,818 and $600,909 and dividing by 2, which is the number of measurement days

($601,818 + $600,909) / 2

(GG)

$601,364 (transfer to GG on worksheet 3)

Step 5.1: Aust Co's adjusted average debt is $9m and its maximum allowable debt is $6,474,090

Excess debt
($9m − $$6.474m)

(LL)

$2.526m

Step 5.2: Aust Co's average debt is $12m

Average debt

(MM)

$12m

Step 5.3: Divide the amount at LL by the amount at MM to calculate the proportion to be applied to Aust Co's debt deductions

LL   MM
($2.526m   $12m)

(NN)

0.2105

Step 5.4: Aust Co's debt deductions for the income year are $2,100,000

Debt deductions for the year

(PP)

$2,100,000

Step 5.5: The amount of debt deductions disallowed is calculated by multiplying the amount at NN by the amount at PP

NN   PP=
0.2105   $2,100,000

$442,050