Step 4: Calculate the debt deductions disallowed

Step 4.1: Calculate the amount by which the ADI's average equity capital is less than its minimum capital amount; that is, the capital shortfall.

Insert the result at D on the Worksheet 30: Inward investing entity (ADI)'s step 4.

The proportion of debt deductions disallowed depends on the amount by which the ADI's average equity capital (from step 1) is less than its minimum capital amount.

Step 4.2: Calculate the ADI's average debt.

Insert this amount at E on Worksheet 30: Inward investing entity (ADI)'s step 4.

The average debt is the average value, for the income year, of the ADI's debt capital that gives rise to debt deductions (in Australia) in that year or any other income year. However, it does not include debt that gives rise to allowable off-shore banking deductions.

Step 4.3: Divide the amount at D by the amount at E.

Insert the result at F on Worksheet 30: Inward investing entity (ADI)'s step 4.

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

Step 4.4: Calculate the amount of debt deductions for the income year.

Insert this amount at G on Worksheet 30: Inward investing entity (ADI)'s step 4.

The calculation is applied to all the ADI's debt deductions for the year, other than allowable off-shore banking deductions.

Step 4.5: Multiply the amount at F by the amount at G. This is the amount of debt deductions disallowed.

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

Step 4.1: Capital shortfall (minimum capital amount minus average equity capital)

(D) ______________

Step 4.2: Average debt

(E) ______________

Step 4.3: D ÷ E

(F) _______________

Step 4.4: Debt deductions for the income year

(G) ______________

Step 4.5: F × G

This is the total debt deductions disallowed.

= ________________