# Step 2: Calculate the safe harbour capital amount

To check if you meet the requirements under the thin capitalisation rules if you are an ADI inwards investing entity.

Last updated 19 October 2017

The safe harbour capital amount is a level of equity capital that an ADI must allocate to its Australian operations. This amount is based on the value of net risk-weighted assets attributable to the Australian operations. The safe harbour capital amount is broadly based on the methodology of the capital adequacy requirements prescribed by prudential regulators, for example, Australian Prudential Regulation Authority (APRA).

Table 55: ADI inward investing entity's step 2 and Worksheet 47: ADI inward investing entity's step 2 explains how to work out the safe harbour capital amount.

Note: You will need a copy of the prudential standards to work out the safe harbour capital amount.

Table 55: ADI inward investing entity's step 2

Steps

Step 2.1: Calculate the average value, for the income year, of all the ADI's net risk-weighted assets that are:

• attributable to the ADI's Australian permanent establishments through which it carries on its banking business in Australia, and
• not attributable to those Australian permanent establishment's offshore banking activities

Insert this amount at C on Worksheet 47: ADI inward investing entity's step 2

The first step is to work out the average value of the ADI's net risk-weighted assets attributable to its Australian operations. The risk-weighted assets are its risk exposures determined in accordance with either the Australian prudential standards or the prudential standards of the foreign country in which the ADI is a resident

Step 2.2: Calculate the safe harbour capital amount by multiplying the amount at C by 6%

The safe harbour capital amount represents 6% of the average risk-weighted assets attributable to the Australian banking permanent establishments

Worksheet 47: ADI inward investing entity's step 2

Steps

\$

Step 2.1: Average risk-weighted assets attributable to the Australian banking permanent establishments

(C) _____________

Step 2.2: Safe harbour capital amount (C X 6%)

= _______________

If the ADI's average equity capital is equal to or more than the safe harbour capital amount, the ADI is not disallowed any debt deductions under the thin capitalisation rules. You do not have to complete any more calculations.

If the ADI's average equity capital is less than the safe harbour capital amount, you can choose to calculate an arm's length capital amount – see step 3 – or you can use your safe harbour capital amount as the minimum capital amount and debt deductions will be disallowed on this basis – see step 4.