Specialist credit card institutions are authorised to conduct limited banking business and are supervised differently by APRA compared to other ADIs.
Unlike other ADIs, the capital adequacy of specialist credit card institutions is not determined on a consolidated group basis where a specialist credit card institution is part of a group that does not contain any other types of ADI. In this case, the capital adequacy requirements apply to a specialist credit card institution and its subsidiaries (if any) on a consolidated basis but not the wider corporate group.
The advent of ADIs whose capital adequacy is not determined on a consolidated group basis for prudential purposes was not originally considered when the thin capitalisation rules were first introduced. As such, the thin capitalisation rules in their original form require all consolidated or MEC groups containing ADIs to determine their capital adequacy by taking into account risk-weighted assets on a group-wide basis.
It is considered that this requirement places unnecessary compliance costs on groups containing ADIs that are only specialist credit card institutions.
Therefore, provided certain conditions are satisfied, the head company of a consolidated or MEC group containing one or more ADIs is allowed to apply the thin capitalisation rules as if the group did not contain an ADI, where all the ADIs in the group are specialist credit card institutions. Each specialist credit card institution will instead be treated as if it was a financial entity.
What is a specialist credit card institution?
A specialist credit card institution is defined as an ADI, authorised under the Banking Act 1959, to conduct banking business that is confined to credit card acquiring and/or credit card issuing and involves participation in a payment system that is a credit card scheme, where that payment system is designated under section 11 of the Payment Systems (Regulation) Act 1998.
- subsection 820-588(3) of the ITAA 1997.
The three conditions that must be met in order for a choice to be made to treat a specialist credit card institution as a non-ADI for thin capitalisation purposes are:
- At all times in a period, at least one member of the consolidated group or MEC group is an ADI.
- Each ADI that is a member of the group at any time in the period is a specialist credit card institution at that time.
- The head company of the group for the period chooses, before lodging its income tax return for the income year, to apply the thin capitalisation rules as if the group did not contain any ADIs during the period.
- subsection 820-588(2) of the ITAA 1997.
Result of choice
If a choice is made, each specialist credit card institution in the group will be treated for thin capitalisation purposes as a financial entity during the relevant periods.
The head company of the group will be classified as a non-ADI financial outward investor, non-ADI financial inward investor or non-ADI financial inward investment vehicle, as the case may be; that is, depending on what the usual thin capitalisation classification of the head company would be without the ADI rules applying.
This means, Subdivision 820-B or 820-C of the ITAA 1997 will apply to the head company instead of Subdivision 820-D.
- subsection 820-588(1) of the ITAA 1997.