• Grouping branches of foreign banks and financial entities

    On or after 1 July 2002 and for thin capitalisation purposes only, a head company of a consolidated group, or a single resident company, can choose to treat an Australian branch of an establishment entity as part of itself where the head company or single company are part of the same wholly owned group as the establishment entity. This choice can be made each income year.

    An establishment entity is a reference to either of the following:

    • a foreign bank that carries on its banking business in Australia through at least one Australian permanent establishment
    • a foreign entity that is a financial entity and has at least one Australian permanent establishment.

    See also:

    When an Australian branch of an establishment entity can be treated as part of a head company

    The head company can make a choice to include the Australian branch of the establishment entity during the grouping period, which can be all or part of the income year during which the group existed. The grouping period is the period during which the following conditions are satisfied within the head company's income year:

    • The Australian branch of the establishment entity and the head company are members of the same wholly-owned group.
    • The establishment entity either
      • carries on a banking business in Australia through at least one Australian permanent establishment
      • is a financial entity and has at least one Australian permanent establishment.
       

    If a choice is made, the Australian branch of the establishment entity is included in the consolidated group or MEC group for the entire grouping period. The head company cannot choose to include the Australian branch of the establishment entity for part of the grouping period only. Once made, the choice is binding on both the head company and the establishment entity and is binding for the entire grouping period in the head company's income year. A new choice may be made each income year.

    See also:

    If the head company and establishment entity have different income years

    Where the head company and the establishment entity have different income years, the thin capitalisation position must be worked out for each period that relates to the different income years. This is because both the head company and the establishment entity need to calculate the extent to which debt deductions are denied, if any.

    Example 6: Choosing to include the Australian branch of the establishment entity in a consolidated group

    The head company has an income year ending 30 June 2015. The establishment entity has a substituted accounting period ending 31 December 2014. The head company chooses to include the Australian branch of the establishment entity in its consolidated group. The grouping period spans the head company's entire income year and so the head company must treat the Australian branch as part of itself for its entire income year.

    A thin capitalisation calculation must be done for three separate periods being the:

    • period 1 July to 31 December 2014
    • period 1 January to 30 June 2015
    • following period of 1 July to 31 December 2015.

    The combined calculations for the first and second periods determine any disallowed debt deductions for the head company and the combined calculations for the second and third test periods determine any disallowed deductions for the establishment entity.

    End of example

    See also:

    When an Australian branch of an establishment entity can be treated as part of a single Australian resident company

    The rules also allow a single Australian resident company to treat an Australian branch of an establishment entity as part of itself for thin capitalisation purposes only.

    The company can make a choice to include the Australian branch of an establishment entity during the grouping period. The grouping period, which can be all or part of an income year, is the period during which the following conditions are satisfied within the single company's income year:

    • The single company was an Australian entity and was not a prescribed dual resident.
    • The single entity was not a member of a consolidatable group, nor a member of a consolidated group or a member of a MEC group.
    • The establishment entity and the single company are members of the same wholly-owned group, and either of the following applies
      • the establishment entity carries on a banking business in Australia through at least one Australian permanent establishment
      • the establishment entity is a financial entity and has at least one Australian permanent establishment.
       

    If a choice is made, the Australian branch of the establishment entity is treated as being part of the single company for the entire grouping period. The company cannot choose to include the Australian branch of the establishment entity for part of the grouping period only. Once made, the choice made by the single resident company is binding on it and the establishment entity and is binding for the entire grouping period in the single company's income year. A new choice may be made each income year.

    See also:

    If the single company and establishment entity have different income years

    As with a head company, where the single company and the establishment entity have different income years, the thin capitalisation position must be worked out for each period that relates to the different income years. This is because both the single company and the establishment entity need to calculate the extent to which debt deductions are denied, if any. See the earlier example and substitute references to a head company with a reference to a single company.

    Including an Australian branch of an establishment entity

    When a head company or single company chooses to include an Australian branch of an establishment entity then, during the grouping period, the branch is not considered to be part of the establishment entity for thin capitalisation purposes.

    During this period any debt deductions incurred by the establishment entity and attributable to the Australian branch of the establishment entity are treated as being debt deductions of the head company or single company for thin capitalisation purposes.

    Similarly, each asset and liability attributable to the Australian branch of the establishment entity is treated as being as asset and liability of the head company or single company for thin capitalisation purposes and are included for those purposes in the head company or single company's calculations.

    See also:

    Even though the Australian branch of the establishment entity is not treated as being a part of the establishment entity for the purposes of determining the thin capitalisation position of the head company or single company, the establishment entity is still subject to the requirement in Subdivision 820-L of the ITAA 1997 to keep certain records in relation to its Australian branches.

    Last modified: 09 Mar 2016QC 48180