Search Suggestion:

# Step 1: Calculate the adjusted average debt

To check if you meet the requirements under the thin capitalisation rules if you're a non-ADI general outward investor.

Last updated 8 March 2016

The adjusted average debt of a non-ADI general outward investor is, broadly, 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.

Table 10: Non-ADI general outward investor's step 1 and Worksheet 2: Non-ADI general outward investor's step 1 explain how a non-ADI general outward investor calculates its adjusted average debt.

Ignore any amounts attributable to any of the entity's overseas permanent establishments.

Table 10: Non-ADI general outward investor's step 1

Steps

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 2: Non-ADI general outward investor'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 income year

This includes debt interests that do not initially give rise to debt deductions but will do so in the future

Step 1.2: Calculate the average value of all the entity's associate entity debt for that year.

Insert this amount at B on Worksheet 2: Non-ADI general outward investor's step 1

The average debt capital is then reduced by associate entity debt

Step 1.3: Calculate the average value of all the entity's controlled foreign entity debt for that year

Insert this amount at C on Worksheet 2: Non-ADI general outward investor's step 1

The average debt capital is further reduced by any amounts lent to controlled foreign entities of which the entity is an Australian controller

Step 1.4: Calculate the average value of any of the entity's cost-free debt capital for that year

Insert this amount at D on Worksheet 2: Non-ADI general outward investor's step 1

Cost-free debt capital is included in adjusted average debt for integrity reasons

Step 1.5: Calculate the adjusted average debt. Adjusted average debt is the result of ABC + D

Adjusted average debt represents total debt A less associate entity debt B and controlled foreign entity debt C, increased by cost-free debt capital D

Worksheet 2: Non-ADI general outward investor's step 1

Steps

\$

Step 1.1: Average debt capital

(A) __________

Step 1.2: Average associate entity debt

(B) __________

Step 1.3: Average controlled foreign entity debt

(C) __________

Step 1.4: Average cost-free debt capital

(D) __________

Step 1.5: Adjusted average debt = ABC + D

___________

 If the entity's adjusted average debt is nil 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 the entity's adjusted average debt is a positive amount, you must calculate the entity's maximum allowable debt amount, which is the greatest of the:

• safe harbour debt amount – step 2
• worldwide gearing debt amount – step 3
• arm's length debt amount – step 4.