Before you begin
The calculation used by an inward investor (financial) will depend on the method chosen for their thin capitalisation calculation. A inward investment vehicle (financial) can either calculate its maximum allowable debt or choose to apply the third part debt test.
If you make a choice to apply the third party debt test, calculate whether you have met the thin capitalisation rules.
If you're not using the TPDT, follow these steps to calculate the maximum allowable debt.
- Step 1: Calculate the adjusted average debt
- Steps 2 and 3 Calculate the safe harbour debt amount1
- Step 45: Calculate the worldwide gearing debt amount
- Step 56: Calculate debt deductions disallowed using the maximum allowable debt methods.
A financial entity that elects to use the thin capitalisation rules that apply to ADI entities will need to refer to ADI inward investing entity.
For more information, see Electing to use the ADI rules.
Step 1
Broadly, the adjusted average debt of an inward investment vehicle (financial) is the debt capital used in its Australian operations that gives rise to debt deductions. It does not matter whether the debt deductions arise in the year the debt interest was issued or in any other income year.
Debt that does not give rise to any deductible expenditure at any time is generally not included in adjusted average debt. However, it is included if the debt interest is cost-free debt capital – see step 1.4.
The adjusted average debt also includes assets that comprise securities loan arrangement amounts where those amounts do not otherwise qualify as debt interests – see step 1.3.
Table 17: Inward investment vehicle (financial)'s step 1 and Worksheet 10: Inward investment vehicle (financial)'s step 1 explains how an inward investment vehicle (financial) calculates its adjusted average debt.
For more information, see subsection 820-185(3) of the ITAA 1997.
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Steps |
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Step 1.1: Calculate the average value, for the income year, of all the entity's debt capital that gives rise to its debt deductions for that year or any other income year. Insert this amount at A on Worksheet 10: Inward investment vehicle (financial)'s step 1. |
The entity's debt capital is the average value of all the debt interests issued by the entity that give rise to debt deductions in any year of income. This includes debt interests that do not initially give rise to debt deductions but will do so in the future. |
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Step 1.2: Calculate the average value, for that year, of all the entity's associate entity debt. Insert this amount at B on Worksheet 10: Inward investment vehicle (financial)'s step 1. |
The average debt capital is then reduced by associate entity debt. |
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Step 1.3: Calculate the average value, for that year, of the entity's borrowed securities amount. Insert this amount at C on Worksheet 10: Inward investment vehicle (financial)'s step 1. |
The amounts included in an entity's borrowed securities amount are explained in Borrowed securities amount. Broadly, they include the entity's liabilities incurred under a repurchase agreement, sell-buy-back arrangement or securities loan arrangement. |
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Step 1.4: Calculate the average value, for that year, of any of the entity's cost-free debt capital. Insert this amount at D on Worksheet 10: Inward investment vehicle (financial)'s step 1. |
Cost-free debt capital is included in adjusted average debt for integrity reasons. |
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Step 1.5: Calculate the adjusted average debt. Adjusted average debt is the result of A − B + C + D. |
Adjusted average debt represents total debt (A) less associate entity debt (B), increased by certain securities loan arrangement amounts (C) and cost-free debt capital (D). |
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Steps |
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Step 1.1: Average debt capital |
(A) _____________ |
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Step 1.2: Average associate entity debt |
(B) _____________ |
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Step 1.3: Average borrowed securities amount |
(C) _____________ |
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Step 1.4: Average cost-free debt capital |
(D) ____________ |
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Step 1.5: Adjusted average debt |
=_____________ |
If the adjusted average debt is zero or a negative amount, the entity has not exceeded its maximum allowable debt and it is not disallowed any debt deductions under the thin capitalisation rules. You do not have to complete any further calculations.
If adjusted average debt is a positive amount, you need to calculate the entity's maximum allowable debt amount, which is the greater of the:
- safe harbour debt amount – steps 2 and 3
- worldwide gearing amount – step 4.
For more information, see Worked example of calculations for an inward investment vehicle (financial).