Non-ADI general entity
Under the thin capitalisation rules, a non-ADI entity must calculate its adjusted average debt and compare it to the maximum allowable debt prescribed under the rules. Debt deductions are disallowed to the extent that the amount of adjusted average debt used to fund an entity's Australian operations exceeds the prescribed maximum allowable debt. If the entity's adjusted average debt does not exceed its maximum allowable debt, no debt deductions are disallowed under the thin capitalisation rules.
For an outward investing entity that is neither an ADI nor a financial entity, called a Non-ADI general entity, the maximum allowable debt is the greatest of the:
- safe harbour debt amount, which is 3/5 of the average value of the entity's Australian assets, with some adjustments. This is based on the safe harbour ratio of 1.5:1
- arm's length debt amount, which is the amount of debt that could have been borrowed by an independent party carrying on the entity's Australian operations
- worldwide gearing debt amount, which in certain circumstances can allow the Australian operations to be geared at up to 100% of the gearing of the Australian entity's worldwide group.
See Non-ADI general outward investor for the steps you follow to calculate these.
For an inward investing entity that is a non-ADI, the maximum allowable debt is the greater of the following:
- the safe harbour debt amount;
- the arm's length debt amount; or
- the worldwide gearing debt amount unless any of the following apply
- the entity’s statement worldwide equity, or statement worldwide assets is nil or negative
- audited consolidated financial statements do not exist
- the result of applying this formula is greater than 0.5: (average Australian assets of the entity) / (statement worldwide assets of the entity for the income year).
Where average Australian assets of an entity is the average value for the statement period of all assets of the entity, other than any of the following:
- any assets attributable to the entity’s overseas permanent establishments
- an debt interests held by the entity, to the extent to which any value of the interests is all or part of the controlled foreign entity debt of the entity
- any equity interests or debt interests held by the entity, to the extent to which any value of the interests is all or a part of the controlled foreign entity equity of the entity.
See Non-ADI general inward investor for the steps you follow to calculate these.
Entities do not necessarily need to calculate their maximum allowable debt under all the methods. Generally the safe harbour debt amount would be calculated first and then the other amounts are calculated only if the entity's adjusted average debt is greater than the safe harbour debt amount.
If the entity is both an inward investment vehicle (non-ADI) and an outward investing entity (non-ADI), the rules for outward investing entities apply, however the entity can only choose to apply the a worldwide gearing debt test if certain requirements are met (unless the entity is the head of a consolidated group or multiple entry consolidated (MEC) group, in which case it may be classified as an outward investing entity).
Under the thin capitalisation rules, a non-ADI entity must calculate its adjusted average debt and compare it to the maximum allowable debt prescribed under the rules.