• Step 4: Calculate the worldwide gearing debt amount

    The worldwide gearing test is available to inward investing entities (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. The gearing of the entity’s worldwide group is determined by reference to method statements contained in section 820-216 to section 820-219 of the ITAA 1997.

    If the entity is an inward investor (general) for the income year they can determine the worldwide gearing debt amount by applying the method statement contained in section 820-218 of the ITAA 1997.

    An inward investor (non-ADI) can choose to apply the worldwide gearing debt test, provided that the result of the following formula is greater than 0.5: (average Australian assets of the entity) / (statement worldwide assets of the entity for the income year).

    This threshold requires that the entity’s Australian assets represent no more than 50% of the consolidated group’s worldwide assets.

    Table 40: Non-ADI general inward investor's step 4 and Worksheet 32: Non-ADI general inward investor'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.

    Step 4 assumes you have completed Worksheet 30: Non-ADI general inward investor'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 30: Non-ADI general inward investor'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).

    For an entity that is an inward investor (general), the worldwide gearing debt amount is calculated as follows

    Table 40: Non-ADI general inward investor's step 4

    Steps

    Comments

    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 32: Non-ADI general inward investor's step 4

    Statement worldwide debt is the sum 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

    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 32: Non-ADI general inward investor's step 4

    Statement worldwide equity is the amount of net assets for the period

    Refer to Section 820-933(2) of the ITAA 1997

    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 32: Non-ADI general inward investor's step 4

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

    Step 4.4: Add 1 (one) to the amount at BB (Step 4.3)

    Insert the result at CC on Worksheet 32: Non-ADI general inward investor's step 4

    Steps 4.4 and 4.5 convert the ratio to a fraction, which is later applied to the entity's net Australian assets

    Step 4.5: Divide the amount at BB by the amount at CC

    Insert the result at DD on Worksheet 32: Non-ADI general inward investor's step 4

     

    Step 4.6: Multiply the amount at DD by G

    Insert the result at EE on Worksheet 32: Non-ADI general inward investor's step 4

    This applies the ratio, expressed as a fraction, to net Australian assets, as calculated at G in Worksheet 30: Non-ADI general inward investor's step 2, the safe harbour debt amount – see step 2.5

    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 32: Non-ADI general inward investor's step 4. Otherwise, calculate the average value of the entity's associate entity excess amount – see Worksheet 33: Non-ADI general inward investor's step 4A. Transfer the amount at FF on Worksheet 33: Non-ADI general inward investor's step 4A to FF on Worksheet 32: Non-ADI general inward investor's step 4

    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 39: Non-ADI general inward investor's step 2A and Worksheet 33: Non-ADI general inward investor'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

    Step 4.8: Calculate the entity's worldwide gearing debt amount by adding the amounts at EE and FF

    The worldwide gearing debt amount represents the fraction of net Australian assets, increased by any associate entity excess amount

    Worksheet 32: Non-ADI general inward investor's step 4

    Steps

    $

    Step 4.1: Statement worldwide debt

    (Z) __________

    Step 4.2: Statement worldwide equity

    (AA) __________

    Step 4.3: Divide Z by  AA

    (BB) __________

    Step 4.4: BB + 1

    (CC) __________

    Step 4.5: Divide BB by  CC

    (DD) __________

    Step 4.6: Multiply DD  by amount at G on Worksheet 30: Non-ADI general inward investor's step 2

    (EE) __________

    Step 4.7: Average associate entity excess amount – from FF on Worksheet 33: Non-ADI general inward investor's step 4A

    (FF) __________

    Step 4.8: Worldwide gearing debt amount (EE + FF)

    =      ___________

    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 41: Non-ADI general inward investor's step 4A and Worksheet 33: Non-ADI general inward investor's step 4A set out how to calculate the amount at FF on Worksheet 32: Non-ADI general inward investor'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 32: Non-ADI general inward investor'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 31: Non-ADI general inward investor'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. Step 4A assumes you have completed Worksheet 31: Non-ADI general inward 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 the overseas permanent establishments of the investing entity or associate entity.

    Table 41: Non-ADI general inward investor's step 4A

    Steps

    Comments

    Step 4A.1: Transfer the amount at M on Worksheet 31: Non-ADI general inward investor's step 2A to M on Worksheet 33: Non-ADI general inward investor's step 4A

    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 31: Non-ADI general inward investor's step 2A at M (step 2A.1) and can be transferred directly from there

    Step 4A.2: Transfer the amount from N on Worksheet 31: Non-ADI general inward investor's step 2A to N on Worksheet 33: Non-ADI general inward 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 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 31: Non-ADI general inward investor's step 2A at N (step 2A.2) and can be transferred directly from there

    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 32: Non-ADI general inward investor's step 4

    Insert the result at HH on Worksheet 33: Non-ADI general inward investor's step 4A

     

    Step 4A.4: Transfer the amount at W on Worksheet 31: Non-ADI general inward investor's step 2A to W on Worksheet 33: Non-ADI general inward 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 W on Worksheet 31: Non-ADI general inward 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 HH – premium excess amount and W – attributable safe harbour excess amount

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

    Step 4A.6: If the entity has only one associate entity, transfer any positive amount at JJ to KK on Worksheet 33: Non-ADI general inward investor'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 33: Non-ADI general inward 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 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

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

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

    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 33: Non-ADI general inward 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 33: Non-ADI general inward investor's step 4

    Steps

    $

    Step 4A.1: Investing entity's associate entity equity on a measurement day from M on Worksheet 31: Non-ADI general inward investor's step 2A

    (M) __________

    Step 4A.2: Associate entity equity capital attributable to the investing entity's equity interests on a measurement day from N on Worksheet 31: Non-ADI general inward investor's step 2A

    (N) __________

    If N is negative, it is taken to be nil

    Step 4A.3: Premium excess amount
    (MN)   EE

    (HH) __________

    HH may be a negative amount

    Step 4A.4: Attributable safe harbour excess amount from W on Worksheet 31: Non-ADI general inward investor's step 2A

    (W) __________

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

    (JJ) __________

    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

    (KK) __________

    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

    (FF) __________

    Transfer this amount to FF on Worksheet 32: Non-ADI general inward investor's step 4

    Last modified: 09 Mar 2016QC 48262