• Foreign controlled Australian entity

    The thin capitalisation rules also apply to foreign controlled Australian entities. A foreign controlled Australian entity is an Australian entity that is any of the following:

    • a foreign controlled Australian company, except a corporate limited partnership
    • a foreign controlled Australian trust
    • a foreign controlled Australian partnership, including a corporate limited partnership.

    See also:

    Foreign controlled Australian company

    An Australian resident company (except a corporate limited partnership) is a foreign controlled Australian company if any of the following apply:

    • a group of five or fewer foreign entities (each of which holds a thin capitalisation control interest of at least 1% in the Australian company) holds a thin capitalisation control interest of at least 50% in the Australian company. For example, if three foreign residents hold interests of 20% each in an Australian company, totalling 60%, that Australian company is foreign controlled
    • a single foreign entity holds a thin capitalisation control interest of at least 40% in the Australian company and no other entity (except for an associate entity) controls that Australian company. For example, if a foreign resident holds an interest of 45% in the Australian company and 11 Australian residents that are unrelated to the foreign resident and each other hold 5% each, the Australian company is foreign controlled. However, this test is not satisfied if, for example, the foreign company holds 45% and a single, unrelated Australian entity holds 55%
    • a group of five or fewer foreign entities, either alone or with associate entities, control the company.

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    Foreign controlled Australian trust

    An Australian trust is a foreign controlled Australian trust if one of the following four tests applies:

    • A group of five or fewer foreign entities (each of which holds a thin capitalisation control interest of at least 1% in the Australian trust) holds a thin capitalisation control interest of at least 50% in the Australian trust. For example, if three foreign residents are entitled to 30%, 10% and 10% respectively of an Australian trust's income, the trust is foreign controlled.
    • A single foreign entity holds a thin capitalisation control interest of at least 40% in the Australian trust, and no other entity (except for an associate entity) controls the trust.
    • All of the following apply
      • At least one of the objects or beneficiaries of the Australian trust is a foreign entity.
      • The trust has made at least one distribution of income or capital to that foreign entity (directly or indirectly) during the current income year or during the preceding two income years.
      • Australian entities hold thin capitalisation control interests of 50% or less in the trust.
       
    • A foreign entity is in a position to control the trust.

    Broadly, a foreign entity is in a position to control the Australian trust if any of the following apply:

    • the foreign entity, or an associate entity of the foreign entity, can obtain the beneficial enjoyment of the trust's income or capital
    • the foreign entity, or an associate entity of the foreign entity, can control the application of the trust's income or capital
    • a trustee might reasonably be expected to act in accordance with directions of the foreign entity or an associate entity of the foreign entity
    • the foreign entity, or an associate entity of the foreign entity, can remove or appoint a trustee.

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    Foreign controlled Australian partnership

    A partnership that is not a corporate limited partnership

    An Australian partnership, other than a corporate limited partnership, is a foreign controlled Australian partnership if at least one of the partners is an Australian entity and one of the following applies:

    • A group of five or fewer foreign entities (each of which holds a thin capitalisation control interest of at least 1% in the Australian partnership) hold a thin capitalisation control interest of at least 50% in the Australian partnership, for example, if three foreign residents are entitled to 20% each of an Australian partnership's income
    • A single foreign entity holds a thin capitalisation control interest of at least 40% in the Australian partnership, and no other entity (except for an associate entity) controls the partnership.

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    Corporate limited partnership

    An Australian corporate limited partnership is a foreign controlled Australian partnership if either of the following apply:

    • a group of five or fewer foreign entities (each of which holds a thin capitalisation control interest of at least 1% in the Australian partnership) holds a thin capitalisation control interest of at least 50% in the Australian partnership
    • at least one of the general partners is either a foreign entity or a foreign controlled Australian entity.

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    Exception

    In certain circumstances, an Australian entity may not be a foreign controlled Australian entity even though the above tests are met. This will be the case where, ignoring certain deeming rules, the actual control interest is less than 20%.

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    If your entity is a foreign controlled Australian entity

    If the entity is a foreign controlled Australian entity, it is subject to the thin capitalisation rules. How the thin capitalisation rules apply to the entity depends on which category the entity is in. This is explained in Entity categories, which also directs you to the relevant calculations.

    Last modified: 09 Mar 2016QC 48155