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  • Step 6: Calculate the debt deductions disallowed

    The entity's maximum allowable debt is the greatest of the:

    • safe harbour debt amount from steps 2 and 3
    • worldwide gearing debt amount from step 4
    • arm's length debt amount from step 5.

    Note: You do not have to calculate all three amounts. For example, you can use the safe harbour debt amount as the maximum allowable debt amount if you do not want to calculate a worldwide gearing debt amount or an arm's length debt amount.

    If the entity's adjusted average debt is more than its maximum allowable debt, a proportion of its debt deductions cannot be deducted. Table 23: Non-ADI financial outward investor's step 6 and Worksheet 15: Non-ADI financial outward investor's step 6 work out the proportion of debt deductions disallowed.

    See also:

    Table 23: Non-ADI financial outward investor's step 6

    Steps

    Comments

    Step 6.1: Calculate the amount by which the entity's adjusted average debt exceeds its maximum allowable debt; that is, its excess debt

    Insert the result at TT on Worksheet 15: Non-ADI financial outward investor's step 6

    The proportion of debt deductions disallowed depends on the amount by which the entity's adjusted average debt (from step 1) exceeds its maximum allowable debt

    Step 6.2: Calculate the entity's average debt

    Insert this amount at UU on Worksheet 15: Non-ADI financial outward investor's step 6

    The average debt is the average value, for the income year, of:

    • debt capital that gives rise to debt deductions in that or any other income year. This is the amount calculated at A in Worksheet 8: Non-ADI financial outward investor's step 1– see step 1.1

    the entity's cost–free debt capital that is included in its adjusted average debt. This is the amount calculated at E in Worksheet 8: Non-ADI financial outward investor's step 1 – see step 1.5

    Step 6.3: Divide the amount at TT by the amount at UU

    Insert the result at VV on Worksheet 15: Non-ADI financial outward investor's step 6

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

    Step 6.4: Calculate the amount of the debt deductions for the income year

    Insert this amount at WW on Worksheet 15: Non-ADI financial outward investor's step 6

    The calculation is applied to all the entity's debt deductions for the year

    Step 6.5: Multiply the amount at VV by the amount at WW. This is the total debt deductions disallowed

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

    Worksheet 15: Non-ADI financial outward investor's step 6

    Steps

    $

    Steps 6.1: Excess debt; that is, adjusted average debt − maximum allowable debt

    (TT) __________

    Steps 6.2: Average debt

    (UU) __________

    Steps 6.3: TT   UU

    (VV) __________

    Steps 6.4: Debt deductions for the year

    (WW) __________

    Steps 6.5: Total debt deductions disallowed (VV   WW)

    = __________

    This is the amount of debt deductions the non-ADI financial outward investor is not allowed to deduct under the thin capitalisation rules.

    See also:

    • Worked example of calculations for a non-ADI financial outward investor.
    Last modified: 09 Mar 2016QC 48268