Classified as an inward investing entity (ADI)
Where the head company or single company is classified as an inward investing entity (ADI), Subdivision 820-E of the ITAA 1997 applies to determine its thin capitalisation position. The calculations in Subdivision 820-E of the ITAA 1997 are based on the APRA rules. However, as the group may contain entities that are not supervised by APRA, the rules in Subdivision 820-E of the ITAA 1997 are modified in relation to how:
- average equity capital is calculated
- the safe harbour capital amount is calculated.
Calculating average equity capital
Where a head company or single company is classified as an inward investing entity (ADI), the average equity capital for the test period is the sum of the following:
- the average value, for the period, of all the ADI equity capital of the company
- the average value for that period, of so much of the establishment entity's ADI equity capital that is attributable to each of its Australian branches, which has not been allocated to offshore banking activities
- any loans that the establishment entity has provided to its Australian branches that do not give rise to debt deductions for the income year or any other income year.
For more information, see subsections:
- 820-615(2) of the ITAA 1997
- 820-613(3) of the ITAA 1997
Calculating the safe harbour capital amount
The second modification relates to the calculation of the safe harbour capital amount where an Australian branch of an establishment entity is included in the group. When calculating the safe harbour capital amount, the head company or single company includes in its risk-weighted assets much of the establishment entity's risk-weighted assets that are:
- attributable to the Australian branch included in the group
- not attributable to the off-shore banking activities of the establishment entity.
For more information, see subsections 820-615(3) and (4) of the ITAA 1997.