• Step 5: Calculate debt deductions disallowed

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

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

    You do not have to calculate all three amounts. For example, you can use the safe harbour debt amount as the maximum allowable debt 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 15: Non-ADI general outward investor's step 5 and Worksheet 7: Non-ADI general outward investor's step 5 work out the proportion disallowed.

    See also:

    Table 15: Non-ADI general outward investor's step 5

    Steps

    Comments

    Step 5.1: 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 LL on Worksheet 7: Non-ADI general outward investor's step 5

    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 5.2: Calculate the entity's average debt

    Insert this amount at MM on Worksheet 7: Non-ADI general outward investor's step 5

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

    • debt capital that gives rise to debt deductions in that year or any other income year. This is the amount calculated at A in Worksheet 2: Non-ADI general 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 D in Worksheet 2: Non-ADI general outward investor's step1, see step 1.4

     

    Step 5.3: Divide the amount at LL by the amount at MM

    Insert the result at NN on Worksheet 7: Non-ADI general outward investor's step 5

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

    Step 5.4: Calculate the amount of debt deductions for the income year

    Insert this amount at PP on Worksheet 7: Non-ADI general outward investor's step 5

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

    Step 5.5: Multiply the amount at NN by the amount at PP. This is the amount of debt deductions disallowed

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

    Worksheet 7: Non-ADI general outward investor's step 5

    Steps

    $

    Step 5.1: Excess debt; that is, the adjusted average debt − maximum allowable debt

    (LL) __________

    Step 5.2: Average debt

    (MM) __________

    Step 5.3: LL   MM

    (NN) __________

    Step 5.4: Debt deductions for the year.

    (PP) __________

    Step 5.5: Total debt deductions = disallowed (NN   PP)

    __________

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

    See also:

    • Worked example of calculations for a non-ADI general outward investor.
    Last modified: 09 Mar 2016QC 48247