Modifications of the rules

Calculating the value of the head company's or single company's assets and liabilities

The values of the assets and liabilities and other matters are worked out, as far as practicable, based on information that would be contained in a set of consolidated accounts prepared in accordance with accounting standards on each measurement date covering each entity in the group and including each Australian branch that is treated as part of the head company or single company at that time.

Because the consolidation rules only allow 100% owned entities to consolidate, the consolidated accounts prepared for accounting purposes may not be able to be used without modification for thin capitalisation purposes. The accounts are to consider only those entities that can be grouped under the consolidation rules.

For more information, see section 820-611 of the ITAA 1997.

How the thin capitalisation rules apply to a consolidated group or MEC group

The thin capitalisation rules apply to the head company of a consolidated group or MEC group. For the purposes of determining the group's income tax liability, all intra-group transactions, debt and shareholdings are generally not recognised. Each expense or income item external to the group is treated as if it were incurred or received by the head company and, if the thin capitalisation rules are breached, a proportion of debt deductions is disallowed to the head company.

All assets and liabilities of the subsidiary members are treated as if they were assets and liabilities of the head company. For the purposes of the thin capitalisation calculations, the values of the head company's assets and liabilities are based on information that would be contained in a set of consolidated accounts prepared in accordance with the accounting standards.

Because the consolidation rules only allow 100% owned entities to consolidate, the consolidated accounts prepared for accounting purposes may not be able to be used, without modification, for thin capitalisation purposes. The accounts are to incorporate only those entities that can be grouped under the consolidation rules.

For more information, see subdivision 820-FA of the ITAA 1997.

If the consolidated group or MEC group contains a special purpose entity that is exempt under section 820-39 of the ITAA 1997, the entity is treated as not being part of that group for thin capitalisation purposes. This means that its assets and liabilities will not be treated as assets or liabilities of the head company.

For more information, see section 820-584 of the ITAA 1997.

Consolidated group or MEC group for part of an income year

Where a consolidated group or MEC group is formed part way through an income year, the thin capitalisation rules will apply to the entities on a separate basis for the period they were not part of a consolidated group or MEC group. Alternatively, if a consolidated group or MEC group ceases to exist, the thin capitalisation rules will apply on a separate basis to each entity that was in the group from that point forward.

The part of the income year during which the consolidated group or MEC group exists and the part of the income year during which it did not are treated as part year periods and the thin capitalisation calculations are worked out for each period separately.

Consolidated group or MEC group changes classification part way through an income year

If the head company of a consolidated group or MEC group changes classification part way through an income year, the relevant thin capitalisation rules apply separately to each part of the income year on a part year basis.