Step 4: Calculate the worldwide gearing debt amount
The worldwide gearing test is available to inward investing vehicles (non-ADI). This test allows an entity to gear its Australian operations, in certain circumstances, to be geared up to the level of gearing of the entity’s worldwide group.
If the entity is an inward investment vehicle (general) for the income year, and is not also an outward investor (general) for all or part of that year they can apply the worldwide gearing debt amount determined by reference to method statements contained in section 820-216.
See also:
An inward investment vehicle (non-ADI) can choose to apply the worldwide gearing debt test, provided that certain requirements are met.
An entity cannot use the worldwide gearing debt test unless the entity’s Australian assets represent no more than 50 per cent of the consolidated group’s worldwide assets.
Table 27: Non-ADI general inward investment vehicle's step 4 and Worksheet 19: Non-ADI general inward investment vehicle's step 4 explain how to work out the worldwide gearing amount. If the entity has associate entities, you also need to work through Step 4A.
Table 27: Non-ADI general inward investment vehicle's step 4 assumes you have completed Worksheet 17: Non-ADI general inward investment vehicle's step 2 – the safe harbour debt amount calculation. If you have not, you need to complete steps 2.1 to 2.8 in Worksheet 17: Non-ADI general inward investment vehicle's step 2, ignoring any amounts attributable to the entity's overseas permanent establishments.
The ‘statement worldwide debt’ and ‘statement worldwide equity’ under the steps below are determined by reference to amounts shown in the audited consolidated financial statements that are prepared in relation to the ‘worldwide parent entity’ (refer to sections 820-933 and 820-935 of the ITAA 1997 for all requirements and definitions).
Table 27: Non-ADI general inward investment vehicle's step 4
Steps
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Comments
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Step 4.1: Calculate the entity's statement worldwide debt for the income year.
This amount is calculated using specified audited consolidated financial statements.
Insert this amount at Z on Worksheet 19: Non-ADI general inward investment vehicle's step 4
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Statement worldwide debt is the amount of liabilities for the period less the following amounts:
- provisions
- liabilities in relation to distributions to equity participants
- trade payables
- deferred tax liabilities
- liabilities relating to employee benefits
- current tax liabilities
- deferred revenue
- liabilities relating to insurance
- any other amount specified by legislative instrument
Refer to subsection 820-933(1) of the ITAA 1997
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Step 4.2: Calculate the entity's statement worldwide equity for the income year
This amount is calculated using specified audited consolidated financial statements
Insert this amount at AA on Worksheet 19: Non-ADI general inward investment vehicle's step 4
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Statement worldwide equity is the amount of net assets for the period
Refer to Section 820-933(2) of the ITAA 1997
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Step 4.3: Divide the amount at Z by the amount at AA. This is the worldwide gearing ratio.
Insert the result at BB on Worksheet 19: Non-ADI general inward investment vehicle's step 4
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Dividing the statement worldwide debt by the statement worldwide equity establishes the worldwide gearing ratio
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Step 4.4: Add 1 (one) to the amount at BB (Step 4.3).
Insert the result at CC on Worksheet 19: Non-ADI general inward investment vehicle's step 4
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Step 4.4 and Step 4.5 convert the ratio to a fraction, which is later applied to the entity's net Australian assets
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Step 4.5: Divide the amount at BB by the amount at CC
Insert the result at DD on Worksheet 19: Non-ADI general inward investment vehicle's step 4
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Step 4.6: Multiply the amount at DD by G
Insert the result at EE on Worksheet 19: Non-ADI general inward investment vehicle's step 4
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This applies the ratio, expressed as a fraction, to net Australian assets, as calculated at G in Worksheet 17: Non-ADI general inward investment vehicle's step 2, the safe harbour debt amount – see step 2.5
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Step 4.7: If the entity does not have any associate entities that are non-ADI outward investors or inward investors, insert 0 (zero) at FF on Worksheet 19: Non-ADI general inward investment vehicle's step 4. Otherwise, calculate the average value of the entity's associate entity excess amount – see Worksheet 20: Non-ADI general inward investment vehicle's step 4A.
Transfer the amount at FF on Worksheet 20: Non-ADI general inward investment vehicle's step 4A to FF on Worksheet 19: Non-ADI general inward investment vehicle's step 4
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This increases the worldwide gearing debt amount by the average associate entity excess amount. The average associate entity excess amount is worked out in Table 28: Non-ADI general inward investment vehicle's step 4A and Worksheet 20: Non-ADI general inward investment vehicle's step 4A
Note: If the entity does not have any associate entities that are non-ADI outward investors or non-ADI inward investors, the average associate entity excess amount is zero
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Step 4.8: Calculate the entity's worldwide gearing debt amount by adding the amounts at EE and FF
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The worldwide gearing debt amount represents the fraction of net Australian assets, increased by any associate entity excess amount
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Worksheet 19: Non-ADI general inward investment vehicle's step 4
Step 4.1: Statement worldwide debt
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(Z) __________
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Step 4.2: Statement worldwide equity
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(AA) __________
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Step 4.3: Divide Z by AA
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(BB) __________
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Step 4.4: BB + 1
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(CC) __________
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Step 4.5: Divide BB by CC
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(DD) __________
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Step 4.6: Multiply DD by amount at G on Worksheet 17: Non-ADI general inward investment vehicle's step 2
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(EE) __________
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Step 4.7: Average associate entity excess amount – from FF on Worksheet 20: Non-ADI general inward investment vehicle's step 4A
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(FF) __________
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Step 4.8: Worldwide gearing debt amount (EE + FF)
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= ___________
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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.
However, if the entity’s adjusted average debt is more than the worldwide gearing amount, you can choose to use the arm’s length debt amount under step 3 or safe harbour debt amount under step 2.
If you do not wish to calculate the arm’s length debt amount, you can use your worldwide gearing debt amount as your maximum allowable debt amount and debt deductions will be disallowed on this basis – see step 5.
Calculating FF: The average associate entity excess amount for the worldwide gearing debt amount
Table 28: Non-ADI general inward investment vehicle's step 4A and Worksheet 20: Non-ADI general inward investment vehicle's step 4A set out how to calculate the amount at FF on Worksheet 19: Non-ADI general inward investment vehicle's step 4 – the average associate entity excess amount.
If the entity has no associate entities that are non-ADI outward investors or non-ADI inward investors, do not complete this step and show zero at FF on Worksheet 19: Non-ADI general inward investment vehicle's step 4.
Step 4.8 equates to step 2.7 in the safe harbour debt amount calculation. The only difference is that when calculating the premium excess amount, the gearing ratio is applied rather than the 1.5:1 ratio. The attributable safe harbour excess amount is calculated in the same manner and can be transferred directly from U on Worksheet 18: Non-ADI general inward investment vehicle's step 2A.
Explanation: Calculate the 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. Table 28: Non-ADI general inward investment vehicle's step 4A assumes you have completed Worksheet 18: Non-ADI general inward investment vehicle'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 the overseas permanent establishments of the investing entity or associate entity.
Table 28: Non-ADI general inward investment vehicle's step 4A
Steps
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Comments
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Step 4A.1: Transfer the amount at M on Worksheet 18: Non-ADI general inward investment vehicle's step 2A to M on Worksheet 20: Non-ADI general inward investment vehicle's step 4A
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This is the value, on a particular measurement day, of the equity the entity has invested in its associate entity, excluding debt interests. This amount has already been worked out on Worksheet 18: Non-ADI general inward investment vehicle's step 2A at M (step 2A.1) and can be transferred directly from there
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Step 4A.2: Transfer the amount from N on Worksheet 18: Non-ADI general inward investment vehicle's step 2A to N on Worksheet 20: Non-ADI general inward investment vehicle's step 4A
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This is the value, on a particular measurement day, of the associate entity's equity capital attributable to the equity interests held by the entity, excluding the value that represents controlled foreign entity equity of the investing entity. This amount has already been worked out on Worksheet 18: Non-ADI general inward investment vehicle's step 2A at N (step 2A.2) and can be transferred directly from there
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Step 4A.3: Calculate the premium excess by deducting the amount at N from the amount at M and multiplying the result by the amount at EE in Worksheet 19: Non-ADI general inward investment vehicle's step 4
Insert the result at HH on Worksheet 20: Non-ADI general inward investment vehicle's step 4A
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Step 4A.4: Transfer the amount at W on Worksheet 18: Non-ADI general inward investment vehicle's step 2A to W on Worksheet 20: Non-ADI general inward investment vehicle's step 4A
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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 W on Worksheet 18: Non-ADI general inward investment vehicle's step 2A (step 2A.10) and can be transferred directly from there
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Step 4A.5: Calculate the entity's associate entity excess amount by adding the amounts at HH – premium excess amount and W – attributable safe harbour excess amount
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This is the associate entity excess amount for a single associate entity on a particular measurement day
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Step 4A.6: If the entity has only one associate entity, transfer any positive amount at JJ to KK on Worksheet 20: Non-ADI general inward investment vehicle's step 4A. Otherwise, repeat steps 4A.1 to 4A.5 for each associate entity. Add all positive results at JJ and insert amount at KK on Worksheet 20: Non-ADI general inward investment vehicle's step 4A
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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 on any particular measurement day. If the entity has only one associate entity, the amount at KK will be the same as the amount at JJ, provided JJ is positive. If JJ is a negative amount, it is disregarded
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Step 4A.7: Calculate KK – the total associate entity excess amount, steps 4A.1 to 4A.6 – on each other measurement day
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The associate entity excess amount for all associate entities is calculated on each measurement day of the investing entity
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Step 4A.8: Calculate the entity's average associate entity excess amount by adding all the results at KK and divide by the number of measurement days. Insert the result at FF on Worksheet 20: Non-ADI general inward investment vehicle's step 4A
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The results are added together and divided by the number of measurement days to get the average associate entity excess amount
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Worksheet 20: Non-ADI general inward investment vehicle's step 4A
Steps
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$
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Step 4A.1: Investing entity's associate entity equity on a measurement day from M on Worksheet 18: Non-ADI general inward investment vehicle's step 2A
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(M) __________
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Step 4A.2: Associate entity equity capital attributable to the investing entity's equity interests on a measurement day from N on Worksheet 18: Non-ADI general inward investment vehicle's step 2A
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(N) __________
If N is negative, it is taken to be nil
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Step 4A.3: Premium excess amount
(M – N) EE
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(HH) __________
HH may be a negative amount
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Step 4A.4: Attributable safe harbour excess amount from W on Worksheet 18: Non-ADI general inward investment vehicle's step 2A
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(W) __________
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Step 4A.5: Associate entity excess amount on a measurement day for one associate entity (HH + W)
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(JJ) __________
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Step 4A.6: Associate entity excess amount on a measurement day for all associate entities; that is, the sum of the positive results at JJ
Now calculate the associate entity excess amount for all associate entities on the investing entity's other measurement days – see step 4A.7
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(KK) __________
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Step 4A.8: The average value of the associate entity excess amount; that is, the sum of results at KK divided by the number of measurement days
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(FF) __________
Transfer this amount to FF on Worksheet 19: Non-ADI general inward investment vehicle's step 4
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See also:
How to do the fourth step of your calculations to check if you meet the requirements under the thin capitalisation rules if you are a non-ADI general inward investment vehicle.