Steps 2 and 3: Calculate the safe harbour debt amount

Step 2.1: Calculate the average value, for the income year, of all the entity's Australian investments.

Insert this amount at E on Worksheet 18: Inward investor (financial)'s step 2.

The first step is to work out the average value of the entity's Australian investments. This includes all the assets that are attributable to the entity's Australian permanent establishments and other assets that are held for the purposes of producing the entity's assessable income.

Step 2.1A: Calculate the average value, for that year, of the entity's excluded equity interest.

Insert this amount at KK on Worksheet 18: Inward investor (financial)'s step 2.

Certain short-term equity interests reduce the safe harbour debt amount for integrity reasons.

See excluded equity interests.

Step 2.2: Transfer the amount from B on Worksheet 17: Inward investor (financial)'s step 1 to B on Worksheet 18: Inward investor (financial)'s step 2.

This is the average associate entity debt attributable to the entity's Australian permanent establishments. It is the same amount calculated at B on Worksheet 17: Inward investor (financial)'s step 1 (step 1.2) and can be transferred directly from there.

Step 2.3: Calculate the average value, for that year, of all the entity's associate entity equity that has arisen because of the Australian investments.

Insert this amount at F on Worksheet 18: Inward investor (financial)'s step 2.

N/A

Step 2.4: Calculate the average value, for that year, of all the entity's non-debt liabilities that have arisen because of the Australian investments.

Insert this amount at G on Worksheet 18: Inward investor (financial)'s step 2.

 N/A

Step 2.5: Calculate the average value of the entity's zero-capital amount that has arisen because of the Australian investments.

Insert this amount at ZC on Worksheet 18: Inward investor (financial)'s step 2

 N/A

Step 2.6: Calculate the entity's net Australian investments funded by debt and equity. This is the result of E − KK − B − F − G − ZC.

Insert the result at H on Worksheet 18: Inward investor (financial)'s step 2.

This step reduces total assets (E) by the amounts worked out in steps 2.1A to 2.5. The amount at H represents the net Australian investments funded by debt and equity.

Step 2.7: Multiply the amount at H by (15 ÷ 16).

Insert the result at J on Worksheet 18: Inward investor (financial)'s step 2.

Multiplying the amount at H (net assets) by (15 ÷ 16) reflects the debt to equity ratio of 15:1.

Step 2.8: Add back the average value of the entity's zero-capital amount from step 2.5.

Insert this amount at ZC on Worksheet 18: Inward investor (financial)'s step 2.

The zero-capital amount was taken out at step 2.5 and is now added back so that the total debt amount is increased by the average value of the zero-capital amount.

Step 2.9: If the entity does not have any associate entities that are outward investing financial entities (non-ADI) or inward investing financial entities (non-ADI), insert 0 (zero) at K on Worksheet 18: Inward investor (financial)'s step 2. Otherwise, calculate the entity's average associate entity excess amount – see Worksheet 19: Inward investor (financial)'s step 2A.

Transfer the amount at K on Worksheet 19: Inward investor (financial)'s step 2A to K on Worksheet 18: Inward investor (financial)'s step 2.

The average associate entity excess amount is, broadly, the excess borrowing capacity of any associate entity that is an outward investing financial entity (non-ADI) or inward investor (financial). It also recognises any premium paid for the investment in an associate entity. This amount is worked out in step 2A – K on Worksheet 19: Inward investor (financial)'s step 2A.

Note: If the entity does not have any relevant associate entities, this amount is zero.

Step 2.10: Calculate the entity's total debt amount by adding the amount at J, the amount at ZC and the amount at K.

 N/A

Step 2.1: Average Australian investments

Step 2.1A: Average excluded equity interests

(E) _______________

(KK) ______________

Step 2.2: Average associate entity debt – from B on Worksheet 17: Inward investor (financial)'s step 1

(B) ______________

Step 2.3: Average associate entity equity

(F) _______________

Step 2.4: Average non-debt liabilities

(G) ______________

Step 2.5: Average zero-capital amount

(ZC) _____________

Step 2.6: E − KK − B − F − G − ZC

(H) ______________

If H is negative, it is taken to be zero

Step 2.7: H × (15 ÷ 16)

(J) ______________

Step 2.8: Average zero-capital amount – from step 2.5

(ZC) _____________

Step 2.9: Average associate entity excess amount – from K on Worksheet 19: Inward investor (financial)'s step 2A

(K) ______________

Step 2.10: Total debt amount (J + ZC + K)

= _______________

Step 2A.1: Calculate, on a particular measurement day, the value of the entity's associate entity equity attributable to the associate entity, excluding the value of any debt interests issued to the investing entity by the associate entity.

Insert this amount at L on Worksheet 19: Inward investor (financial)'s step 2A.

This is the value, on a measurement day, of the equity the entity has invested in its associate entity. This excludes any debt interests that may be included in associate entity equity.

Step 2A.2: Calculate, on the measurement day, the value of the associate entity's equity capital that is attributable to equity interests that the entity holds in the associate entity at that time (except equity interests whose value is all or a part of the entity's controlled foreign entity equity at that time).

Insert this amount at M on Worksheet 19: Inward investor (financial)'s step 2A.

The value of the relevant equity capital is measured by the associate entity in accordance with the accounting standards.

Step 2A.3: Calculate the entity's premium excess amount by deducting the amount at M from the amount at L and multiplying the result by (15 ÷ 16).

Insert the result at N on Worksheet 19: Inward investor (financial)'s step 2A.

 N/A

Step 2A.4: Calculate the associate entity's safe harbour debt amount on the measurement day as if the period consisted of one day only. If the associate entity is a financial inward investor or a financial inward investment vehicle, it is treated as a financial entity inward for these purposes.

Insert this amount at P on Worksheet 19: Inward investor (financial)'s step 2A.

The safe harbour debt amount must be calculated for the associate entity on a measurement day. If the associate entity is an:

• inward investor, complete the calculations in step 2 of 'Inward investor (financial)' for the associate entity
• inward investment vehicle, complete the safe harbour debt calculation in step 2 of 'Inward investor (financial)' for the associate entity.

Step 2A.5: Calculate, on the measurement day, the value of the associate entity's adjusted average debt as if the period consisted of one day only.

Insert this amount at Q on Worksheet 19: Inward investor (financial)'s step 2A.

You must also work out the associate entity's adjusted average debt on a measurement day.

Step 2A.6: Deduct the amount at Q from the amount at P.

Insert the result at R on Worksheet 19: Inward investor (financial)'s step 2A.

Taking the adjusted average debt (Q) away from the safe harbour debt amount (P) gives the associate entity's excess borrowing capacity on a measurement day. If the associate entity has exceeded its safe harbour debt amount, this amount will be negative and is treated as zero.

Step 2A.7: Calculate, on the measurement day, the sum of the value of the following:

• The associate entity's equity capital attributable to the investing entity.
• The debt interests issued to the investing entity by the associate entity that   
  • are on issue
  • no part of which forms part of the associate entity's cost-free debt capital
  • do not give rise to costs covered by paragraph 820-40(1)(a) of the ITAA 1997.
• The debt interests issued to the investing entity by the associate entity that   
  • are on issue
  • give rise to costs covered by paragraph 820-40(1)(a) of the ITAA 1997 but those costs are not deductible from the associate entity's assessable income in any income year.

Insert the result at S on Worksheet 19: Inward investor (financial)'s step 2A.

This works out the value of the associate entity's equity capital, including certain debt interests, attributable to the investing entity on a measurement day.

Step 2A.8: Calculate, on the measurement day, the sum of the value of all of the following:

• The associate entity's equity capital.
• The debt interests issued by the associate entity that   
  • are on issue
  • no part of which forms part of the associate entity's cost-free debt capital
  • do not give rise to costs covered by paragraph 820-40(1)(a) of the ITAA 1997.
• The debt interests issued by the associate entity that   
  • are on issue
  • give rise to costs covered by paragraph 820-40(1)(a) of the ITAA 1997 but those costs are not deductible from the associate entity's assessable income in any income year.

Insert this amount at T on Worksheet 19: Inward investor (financial)'s step 2A.

This works out the value of the associate entity's total equity capital, including certain debt interests, on a measurement day.

Step 2A.9: Divide the amount at S by the amount at T.

Insert the result at U on Worksheet 19: Inward investor (financial)'s step 2A.

This works out the proportion of the associate entity's equity capital attributable to the investing entity on a measurement day.

Step 2A.10: Calculate the entity's attributable safe harbour excess amount by multiplying the amount at R (the associate entity's excess capacity) by the amount at U (the proportion of equity capital attributable to the investing entity).

Insert the result at V on Worksheet 19: Inward investor (financial)'s step 2A.

This applies the proportion worked out in step 2A.9 to the associate entity's excess borrowing capacity to work out the amount of that excess capacity that can be attributed to the investing entity.

Step 2A.11: Calculate the entity's associate entity excess amount by adding the amounts at N (premium excess amount) and V (attributable safe harbour excess amount).

Insert the result at W on Worksheet 19: Inward investor (financial)'s step 2A.

This is the associate entity excess amount for a single associate entity on a measurement day of the investing entity.

Step 2A.12: If the entity has only one associate entity, transfer any positive amount at W to X on Worksheet 19: Inward investor (financial)'s step 2A. Otherwise, repeat steps 2A.1 to 2A.11 for each associate entity.

Then add all positive results at W and insert at X on Worksheet 19: Inward investor (financial)'s step 2A.

The associate entity excess amount must be worked out for each associate entity on a measurement day. Add all the positive associate entity excess amounts together to get the total associate entity excess amount on any particular measurement day.

If the entity has only one associate entity, the amount at W will be the same as the amount at X, provided X is positive. If X is negative, it is disregarded.

Step 2A.13: Calculate X (the total associate entity excess amount – steps 2A.1 to 2A.12) on each other measurement day.

The associate entity excess amount for all associate entities is calculated on each of the investing entity's measurement days.

Step 2A.14: Calculate the entity's average associate entity excess amount by adding the results at X for each measurement day and divide by the number of measurement days.

Insert the result at K on Worksheet 18: Inward investor (financial)'s step 2.

The results are added together and divided by the number of measurement days to get the average associate entity excess amount.

Step 2A.1: Investing entity's associate entity equity on a measurement day

(L) ______________

Step 2A.2: Associate entity equity capital on a measurement day attributable to investing entity

(M) _____________

If M is negative it is taken to be nil

Step 2A.3: Premium excess amount (L − M) × (15 ÷ 16)

(N) ____________

N may be a negative amount

Step 2A.4: Associate entity's safe harbour debt amount on a measurement day

(P) ______________

Step 2A.5: Associate entity's adjusted debt amount on a measurement day

(Q) _____________

Step 2A.6: P − Q

(R) ______________

If R is negative, it is taken to be nil

Step 2A.7: Associate entity's equity capital attributable to investing entity on a measurement day

(S) ______________

Step 2A.8: Associate entity's total equity capital on a measurement day

(T) ______________

Step 2A.9: S ÷ T

(U) ______________

Step 2A.10: Attributable safe harbour excess amount (R × U)

(V) ____________

Step 2A.11: Associate entity excess amount on a measurement day for one associate entity (N  + V)

(W) _____________

Step 2A.12: Associate entity excess amount of a measurement day for all associate entities (sum of positive results at W)

Calculate the associate entity excess amount for all associate entities on the investing entity's other measurement days (step 2A.13)

(X) _____________

Step 2A.14: The average value of the associate entity excess amount (sum of results at X divided by the number of measurement days)

= (K) ____________

Transfer this amount to K on Worksheet 18: Inward investor (financial)'s step 2

Step 3.1: Transfer the amount from E on Worksheet 18: Inward investor (financial)'s step 2 to E on Worksheet 20: Inward investor (financial)'s step 3.

This is the average value of the entity's Australian investments. This amount has already been worked out at E on Worksheet 18: Inward investor (financial)'s step 2 (step 2.1) and can be transferred directly from there.

Step 3.1A: Transfer the amount from KK on Worksheet 18: Inward investor (financial)'s step 2 to KK on Worksheet 20: Inward investor (financial)'s step 3.

This is the average value of the entity's excluded equity interests. This amount has already been worked out at KK on Worksheet 18: Inward investor (financial)'s step 2 (step 2.1A) and can be transferred directly from there.

Step 3.2: Transfer the amount from F on Worksheet 18: Inward investor (financial)'s step 2 to F on Worksheet 20: Inward investor (financial)'s step 3.

This is the average value of associate entity equity attributable to the Australian permanent establishment This amount has already been worked out at F on Worksheet 18: Inward investor (financial)'s step 2 (step 2.3) and can be transferred directly from there.

Step 3.3: Transfer the amount from G on Worksheet 18: Inward investor (financial)'s step 2 to G on Worksheet 20: Inward investor (financial)'s step 3.

This is the average value of non-debt liabilities that have arisen because of the Australian investments. This amount has already been worked out at G on Worksheet 18: Inward investor (financial)'s step 2 (step 2.4) and can be transferred directly from there.

Step 3.4: Calculate the average value of the entity's on-lent amount, to the extent it is an Australian asset.

Insert the result at OA on Worksheet 20: Inward investor (financial)'s step 3.

This reduces Australian investments by the value of the entity's on-lending business, to the extent the on-lent amounts are Australian investments of the inward investor.

Step 3.5: Calculate the entity's net Australian non-lending assets funded by debt and equity. This is the result of E − KK − F − G − OA.

Insert the result at Y on Worksheet 20: Inward investor (financial)'s step 3.

This reduces total assets (E) by the amounts worked out in steps 3.2 to 3.5. The amount at Y represents the net Australian, non-lending assets funded by debt and equity.

Step 3.6: Multiply the amount at Y by (3 ÷ 5).

Insert the result at Z on Worksheet 20: Inward investor (financial)'s step 3.

Multiplying the amount at Y by (3 ÷ 5) reflects the debt to equity ratio of 1.5:1 applied to the entity's non-lending business.

Step 3.7: Add back the average value of the entity's on-lent amount from step 3.4

Insert the amount at OA on Worksheet 20: Inward investor (financial)'s step 3.

This is the same amount calculated in step 3.4. This adds back the on-lent amount.

Step 3.8: Transfer the amount from B on Worksheet 17: Inward investor (financial)'s step 1 to B on Worksheet 20: Inward investor (financial)'s step 3.

This is the average value of associate entity debt. This amount has already been worked out at B on Worksheet 17: Inward investor (financial)'s step 1 (step 1.2) and can be transferred directly from there – this is also the same amount at B on Worksheet 18: Inward investor (financial)'s step 2.

Step 3.9: If the entity does not have any associate entities that are non-ADI entities and subject to the thin capitalisation rules, insert 0 (zero) at AA on Worksheet 20: Inward investor (financial)'s step 3.

Otherwise, calculate the entity's average associate entity excess amount – see Worksheet 21: Inward investor (financial)'s step 3A.

Transfer the amount from AA on Worksheet 21: Inward investor (financial)'s step 3A to AA on Worksheet 20: Inward investor (financial)'s step 3.

The associate entity excess amount is, broadly, the excess borrowing capacity of any associate entities that are outward investing financial entities (non-ADI) or inward investing financial entities (non-ADI). It also recognises any premium paid for the investment in an associate entity. This amount is worked out in step 3A (AA on Worksheet 21: Inward investor (financial)'s step 3A).

Note: If the entity does not have any relevant associate entities the average associate entity excess amount is zero.

Step 3.10: Calculate the entity's adjusted on-lent amount. This is the result of Z + OA − B + AA.

 N/A

Step 3.1: Average assets, from E on Worksheet 18: Inward investor (financial)'s step 2.

(E) ______________

Step 3.1A: Average excluded equity interests, from KK on Worksheet 18: Inward investor (financial)'s step 2.

(KK) ______________

Step 3.2: Average associate entity equity, from F on Worksheet 18: Inward investor (financial)'s step 2.

(F) ______________

Step 3.3: Average non-debt liabilities, from G on Worksheet 18: Inward investor (financial)'s step 2.

(G) ______________

Step 3.4: Average on-lent amount

(OA) _____________

Step 3.5: E − KK − F − G − OA

(Y) ______________

If Y is negative, it is taken to be zero

Step 3.6: Y × (3 ÷ 5)

(Z) ______________

Step 3.7: Average on-lent amount, from step 3.4.

(OA) ______________

Step 3.8: Average associate entity debt, from B on Worksheet 17: Inward investor (financial)'s step 1.

(B) _______________

Step 3.9: Average associate entity excess amount.

(AA) _____________

From AA on Worksheet 21: Inward investor (financial)'s step 3A

3.10: Adjusted on-lent amount (Z + OA − B + AA)

= _______________

Step 3A.1: Transfer the amount at L on Worksheet 19: Inward investor (financial)'s step 2A to L on Worksheet 21: Inward investor (financial)'s step 3A.

This is the value, on a particular measurement day, of the associate entity equity attributable to the associate entity – excluding debt interests.

This amount has already been worked out at L on Worksheet 19: Inward investor (financial)'s step 2A (step 2A.1) and can be transferred directly from there.

Step 3A.2: Transfer the amount at M on Worksheet 19: Inward investor (financial)'s step 2A to M on Worksheet 21: Inward investor (financial)'s step 3A.

This is the value, on a particular measurement day, of the associate entity's equity capital attributable to the investing entity.

This amount has already been worked out at M on Worksheet 19: Inward investor (financial)'s step 2A (step 2A.2) and can be transferred directly from there.

Step 3A.3: Calculate the entity's premium excess amount by deducting the amount at M from the amount at L and multiplying the result by (3 ÷ 5).

Insert the result at BB on Worksheet 21: Inward investor (financial)'s step 3A.

 N/A

Step 3A.4: Transfer the amount at V on Worksheet 19: Inward investor (financial)'s step 2A to V on Worksheet 21: Inward investor (financial)'s step 3A.

This is the attributable safe harbour excess amount on a particular measurement day. This amount was already worked out at V on Worksheet 19: Inward investor (financial)'s step 2A (step 2A.10) and can be transferred directly from there.

Step 3A.5: Calculate the entity's associate entity excess amount by adding the amounts at BB (premium excess amount) and V (attributable safe harbour excess amount).

Insert the result at CC on Worksheet 21: Inward investor (financial)'s step 3A.

This is the associate entity excess amount for a single associate entity on a measurement day of the investing entity.

Step 3A.6: If the entity has only one associate entity, transfer any positive amount at CC to DD on Worksheet 21: Inward investor (financial)'s step 3A. Otherwise, repeat steps 3A.1 to 3A.5 for each associate entity.

Then add all positive results at CC and insert at DD on Worksheet 21: Inward investor (financial)'s step 3A.

The associate entity excess amount must be worked out for each relevant associate entity on a measurement day. Add all the positive associate entity excess amounts together to get the total associate entity excess amount on any particular measurement day.

If the entity has only one associate entity, the amount at DD will be the same as the amount at CC, provided DD is positive. If DD is negative, it is disregarded.

Step 3A.7: Calculate DD (the total associate entity excess amount – steps 3A.1 to 3A.6) on each other measurement day.

The associate entity excess amount is calculated on each of the investing entity's measurement days.

Step 3A.8: Calculate the entity's average associate entity excess amount by adding the results at DD for each measurement day and divide by the number of measurement days.

Insert the result at AA on Worksheet 21: Inward investor (financial)'s step 3A.

The results are added together and divided by the number of measurement days to get the average associate entity excess amount.

Step 3A.1: Investing entity's associate entity equity on a measurement day, from L on Worksheet 19: Inward investor (financial)'s step 2A.

(L) ______________

Step 3A.2: Associate entity's equity capital attributable to the investing entity on a measurement day, from M on Worksheet 19: Inward investor (financial)'s step 2A.

(M) ______________

If M is negative, it is taken to be nil

Step 3A.3: Premium excess amount (L − M) × (3 ÷ 5).

(BB) ____________

BB may be a negative amount

Step 3A.4: Attributable safe harbour excess amount, from V on Worksheet 19: Inward investor (financial)'s step 2A.

(V)_____________

Step 3A.5: Associate entity excess amount on a measurement day for one associate entity (BB + V).

(CC) ____________

Step 3A.6: Associate entity excess amount on a measurement day for all associate entities (sum of positive results at DD).

Now calculate the associate entity excess amount for all associate entities on the investing entity's other measurement days (step 3A.7).

(DD) ____________

Step 3A.8: The average value of the associate entity excess amount (sum of results at DD divided by the number of measurement days).

= (AA) ____________

Transfer this amount to AA on Worksheet 20: Inward investor (financial)'s step 3.