• Step 4: Calculate the worldwide gearing debt amount

    The worldwide gearing test is available to non-ADI financial outward investors that are not also foreign controlled. This test allows Australian operations of an entity, in certain circumstances, to be geared up to 100% of the gearing of the Australian entity’s worldwide group. The gearing of the entity’s worldwide group is determined by reference to method statements contained in section 820-110 of the ITAA 1997 . The worldwide group consists of the Australian entity and the Australian controlled foreign entities for which the Australian entity is an Australian controller.

    Table 21: Non-ADI financial outward investor's step 4 and Worksheet 13: Non-ADI financial outward investor's step 4 explain how to calculate the worldwide gearing debt amount.

    If the entity has any associate entities, you also need to work through Table 22: Non-ADI financial outward investor's step 4A and Worksheet 14: Non-ADI financial outward investor's step 4A.

    See also:

    If the worldwide equity amount (calculated at step 4.2 below) is of a nil amount, the worldwide gearing debt amount cannot be used by the entity as a measure of its maximum allowable debt for the income year. If this is the case, the entity must instead calculate its maximum allowable debt for the income year using either the:

    • safe harbour debt amount – see steps 2 and 3
    • arm's length debt amount – see step 5.

    Note: If an entity is an outward investor (financial), and is also foreign controlled, the worldwide gearing debt amount is the result of applying the method statement in section 820-111 of the ITAA 1997.

    Explanation

    Step 4 assumes you have completed Worksheet 9: Non-ADI financial outward investor's step 2 – the total debt amount calculation. If you have not, you need to complete steps 2.1 to 2.9 in Worksheet 9: Non-ADI financial outward investor's step 2, ignoring any amounts attributable to the entity's overseas permanent establishments.

    Table 21: Non-ADI financial outward investor's step 4

    Steps

    Comments

    Step 4.1: Calculate the entity's worldwide debt for the income year

    Insert this amount at GG on Worksheet 13: Non-ADI financial outward investor's step 4

    Worldwide debt is the sum of the debt interests issued by the Australian entity and its Australian controlled foreign entities, other than debt interests issued to each other

    Step 4.2: Calculate the entity's worldwide equity for the income year

    Insert this amount at HH on Worksheet 13: Non-ADI financial outward investor's step 4

    Worldwide equity is the equity capital of the Australian entity and its Australian controlled foreign entities, other than equity interests held in each other

    Step 4.3: Divide the amount at GG by the amount at HH. This is the worldwide gearing ratio

    Insert the result at JJ on Worksheet 13: Non-ADI financial outward investor's step 4

    Dividing the worldwide debt by the worldwide equity establishes the worldwide gearing ratio

    Step 4.4: Insert the amount of JJ at KK on Worksheet 13: Non-ADI financial outward investor's step 4

     

    Step 4.5: Add 1 (one) to the amount at KK

    Insert the result at LL on Worksheet 13: Non-ADI financial outward investor's step 4

    Steps 4.5 and 4.6 convert the ratio into a fraction, which is later applied to the entity's net Australian assets

    Step 4.6: Divide the amount at KK by the amount at LL

    Insert the result at MM on Worksheet 13: Non-ADI financial outward investor's step 4

     

    Step 4.7: Multiply the amount at MM by the result at K (from the total debt calculation – on Worksheet 9: Non-ADI financial outward investor's step 2)

    Insert the result at NN on Worksheet 13: Non-ADI financial outward investor's step 4

    This applies the ratio, expressed as a fraction, to net Australian assets

    This is calculated at K on Worksheet 9: Non-ADI financial outward investor's step 2 – the total debt amount calculation – see step 2.9

    Step 4.8: Transfer the amount at ZC on Worksheet 9: Non-ADI financial outward investor's step 2 to ZC on Worksheet 13: Non-ADI financial outward investor's step 4

    This is the zero-capital amount and was worked out at ZC on Worksheet 9: Non-ADI financial outward investor's step 2 – step 2.8

    This increases the worldwide gearing debt amount by the amount representing assets against which no capital is required to be held. It mirrors the concession in the total debt amount calculation

    Step 4.9: If the entity does not have any associate entities that are non-ADI outward investors or inward investors, insert 0 (zero) at PP on Worksheet 13: Non-ADI financial outward investor's step 4. Otherwise, calculate the average value of the entity's associate entity excess amount – see Worksheet 14: Non-ADI financial outward investor's step 4A

    Transfer the amount at PP on Worksheet 14: Non-ADI financial outward investor's step 4A to PP on Worksheet 13: Non-ADI financial outward investor's step 4

    This increases the worldwide gearing debt amount by the associate entity excess amount. The average associate entity excess amount is worked out at PP on Worksheet 13: Non-ADI financial outward investor's step 4

    If the entity does not have any associate entities that are non-ADI outward investors or non-ADI inward investors, the associate entity excess amount is zero

    Step 4.10: Calculate the entity's worldwide gearing debt amount by adding the amounts at NN, ZC and PP

    The worldwide gearing debt amount represents the fraction of assets, increased by the zero-capital amount and the associate entity excess amount

    Worksheet 13: Non-ADI financial outward investor's step 4

    Steps

    $

    Step 4.1: Worldwide debt

    (GG) __________

    Step 4.2: Worldwide equity

    (HH) __________

    Step 4.3: GG   HH

    (JJ) __________

    Step 4.4: Insert the amount of JJ at KK

    (KK) __________

    Step 4.5: KK + 1

    (LL) __________

    Step 4.6: KK   LL

    (MM) __________

    Step 4.7: MM   the amount at K on Worksheet 9: Non-ADI financial outward investor's step 2

    (NN) __________

    Step 4.8: Average zero-capital amount from ZC on Worksheet 9: Non-ADI financial outward investor's step 2

    (ZC) __________

    Step 4.9: Average associate entity excess amount from PP on Worksheet 14: Non-ADI financial outward investor's step 4A

    (PP) __________

    Step 4.10: Worldwide gearing debt amount = NN + ZC + PP

    __________

    If the entity's adjusted average debt is equal to or less than this amount, the entity is not disallowed any debt deductions under the thin capitalisation rules. You do not have to complete any more calculations.

    If the entity's adjusted average debt is more than the worldwide gearing debt amount, you can choose to calculate an arm's length debt amount for the entity under step 5. If you do not want to calculate an arm's length debt amount you can use the worldwide gearing debt amount as the maximum allowable debt amount and debt deductions will be disallowed on this basis – see step 6.

    See also:

    • Worked example of calculations for a non-ADI financial outward investor.

    Calculating PP: The average associate entity excess amount for the worldwide gearing debt amount

    Table 22: Non-ADI financial outward investor's step 4A and Worksheet 14: Non-ADI financial outward investor's step 4A set out how to calculate the amount at PP of Worksheet 13: Non-ADI financial outward investor's step 4 – the average associate entity excess amount.

    If the entity does not have any associate entities, do not complete this step and show zero at PP on Worksheet 13: Non-ADI financial outward investor's step 4.

    This is equivalent to step 2.12 in the total debt amount calculation. The only difference is that, when calculating the premium excess amount, the gearing ratio is applied rather than the 15:1 ratio. The attributable safe harbour excess amount is the same and can be transferred directly from Worksheet 10: Non-ADI financial outward investor's step 2A.

    See also:

    Note: An Australian entity will always be an outward investor if it is an associate entity of an outward investor.

    Explanation: Calculate the average associate entity excess amount for the worldwide gearing debt amount

    If the entity has more than one associate entity, repeat steps 4A.1 to 4A.6 for each associate entity on each of the investing entity's measurement days. Step 4A assumes you have completed Worksheet 10: Non-ADI financial outward investor's step 2A. If you have not, you need to complete steps 2A.1, 2A.2 and 2A.4 to 2A.10, ignoring any amounts attributable to overseas permanent establishments of the investing entity or associate entities.

    Table 22: Non-ADI financial outward investor's step 4A

    Steps

    Comments

    Step 4A.1: Transfer the amount at N on Worksheet 10: Non-ADI financial outward investor's step 2A to N on Worksheet 14: Non-ADI financial outward investor's step 4A

    This is the value, on a particular measurement day, of the equity the entity has invested in the associate entity, excluding debt interests. This amount has already been worked out at N on Worksheet 10: Non-ADI financial outward investor's step 2A (step 2A.1) and can be transferred directly from there

    Step 4A.2: Transfer the amount at P on Worksheet 10: Non-ADI financial outward investor's step 2A to P on Worksheet 14: Non-ADI financial outward investor's step 4A

    This is the value, on a particular measurement day, of the associate entity's equity capital attributable to the equity interests the investing entity holds in the associate entity, excluding the value that represents controlled foreign entity equity of the investing entity. This amount has already been worked out at P on Worksheet 10: Non-ADI financial outward investor's step 2A (step 2A.2) and can be transferred directly from there

    Step 4A.3: Calculate the premium excess amount by deducting the amount at P from the amount at N and multiplying the result by the amount at MM (on Worksheet 13: Non-ADI financial outward investor's step 4)

    Insert the result at QQ on Worksheet 14: Non-ADI financial outward investor's step 4A

     

    Step 4A.4: Transfer the amount at X on Worksheet 10: Non-ADI financial outward investor's step 2A to X on Worksheet 14: Non-ADI financial outward investor's step 4A

    This is the attributable safe harbour excess amount for an associate entity on a particular measurement day

    This amount has already been worked out at X on Worksheet 10: Non-ADI financial outward investor's step 2A (step 2A.10) and can be transferred directly from there

    Step 4A.5: Calculate the entity's associate entity excess amount by adding the amounts at QQ (premium excess amount) and X (attributable safe harbour excess amount)

    Insert the result at RR on Worksheet 14: Non-ADI financial outward investor's step 4A

    This is the associate entity excess amount for a single associate entity on a particular measurement day of the investing entity

    Step 4A.6: If the entity has only one associate entity, transfer any positive amount at RR to SS on Worksheet 14: Non-ADI financial outward investor's step 4A. Otherwise, repeat steps 4A.1 to 4A.5 for each associate entity

    Add all positive results at RR and insert at SS on Worksheet 14: Non-ADI financial outward investor's step 4A

    The associate entity excess amount must be worked out for each associate entity on a measurement day

    Add all the positive associate entity excess amounts together to get the total associate entity excess amount for any particular measurement day

    If the entity has only one associate entity, the amount at SS will be the same as the amount at RR, provided RR is positive

    If RR is negative, it is disregarded

    Step 4A.7: Calculate SS (the total associate entity excess amount – steps 4A.1 to 4A.6) on each other measurement day

    The associate entity excess amount is calculated for all associate entities on each of the investing entity's measurement days

    Step 4A.8: Calculate the entity's average associate entity excess amount by adding the results at SS for each measurement day and divide by the number of measurement days

    Insert the result at PP on Worksheet 14: Non-ADI financial outward investor's step 4A

    The results are added together and divided by the number of measurement days to get the average associate entity excess amount

    Worksheet 14: Non-ADI financial outward investor's step 4A

    Steps

    $

    Step 4A.1: Investing entity's associate entity equity on a measurement day from N on Worksheet 10: Non-ADI financial outward investor's step 2A

    (N) __________

    Step 4A.2: Associate entity's equity capital attributable to the investing entity's equity interests on a measurement day from P on Worksheet 10: Non-ADI financial outward investor's step 2A

    (P) __________

    If P is negative, it is taken to be nil

    Step 4A.3: Premium excess amount (NP)   MM

    (QQ) __________

    QQ may be a negative amount

    Step 4A.4: Attributable safe harbour excess amount from X on Worksheet 10: Non-ADI financial outward investor's step 2A

    (X) __________

    Step 4A.5: Associate entity excess amount on a measurement day for one associate entity (QQ + V)

    (RR) __________

    Step 4A.6: Associate entity excess amount on a measurement day for all associate entities. That is, the sum of positive results at RR

    Now calculate the associate entity excess amount for all associate entities on the investing entity's other measurement days – see step 4A.7

    (SS) __________

    Step 4A.8: The average value of the associate entity excess amount (sum of results at SS divided by the number of measurement days)

    = (PP) __________

    Transfer this amount to PP on Worksheet 14: Non-ADI financial outward investor's step 4A

    See also:

    • Worked example of calculations for a non-ADI financial outward investor.
    Last modified: 09 Mar 2016QC 48265