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Understanding thin capitalisation

Explains who Australia's thin capitalisation rules apply to.

Last updated 8 March 2016

Australia's thin capitalisation rules apply to:

  • Australian entities investing overseas and their associate entities
  • foreign entities investing in Australia.

If you answer 'yes' to any of the questions below, or there is a possibility the rules could apply, read this publication to work out whether you are affected by the thin capitalisation rules.

  • Do you carry on business outside of Australia?
  • Do you control a foreign entity by having at least a 10% interest in a foreign entity (this includes direct and indirect interests and interests held by associate entities) or otherwise have substantive control of a foreign entity?
  • Are you associated with anyone who does carry on a business outside of Australia or has at least a 10% interest in a foreign entity?
  • Is your Australian entity controlled by foreign entities, either directly or indirectly?
  • Are you a foreign entity that has investments in Australia?

When considering if the thin capitalisation rules affect you, you need to look at:

A thinly capitalised entity is one whose assets are funded by a high level of debt and relatively little equity.

The thin capitalisation rules apply differently depending on the type of entity.

Control of your entity is central when looking at whether the thin capitalisation rules apply.

Legislation separates entities into categories. Find out how to categorise an entity and where to find rules that apply.

The head of a tax group can be either an outward or inward investing financial entity, ADI or a general class investor.

You must calculate average values for particular matters (for example, assets, liabilities, debt and equity capital).

Some financial entities can elect to apply the ADI thin capitalisation rules.

Some specialist credit card institutions can elect to be treated as financial entities (non-ADI).

How the thin capitalisation rules apply if entity was subject to the rules for part of an income year.