Entity types
The thin capitalisation rules apply differently depending on whether an entity is:
- a general class investor
- a financial entity (non-ADI)
- an authorised deposit-taking institution (ADI).
These categories determine which tests apply to determine whether the thin capitalisation rules will limit an entity's debt deductions for an income year.
If you breach the rules
If an entity breaches the thin capitalisation rules in an income year, a proportion of its debt deductions for that year are disallowed.
Under the fixed ratio test, debt deductions that are disallowed may be carried forward for up to 15 years to offset future taxable income, provided certain conditions are met.
The disallowance of a debt deduction under the thin capitalisation rules does not affect whether the recipient is subject to Australian tax on that amount, including withholding tax. Disallowed debt deductions are not included as part of the CGT cost base when calculating the net gain made in respect of a CGT event.
For more information on debt deductions disallowed by thin capitalisation rules, see section 110-54 of the ITAA 1997.
If you consolidate
If entities choose to consolidate, the thin capitalisation rules apply to the head company of the consolidated group or MEC group.
Once consolidated, the thin capitalisation rules then apply to the group as though it were a single entity for the income year. Subject to certain conditions, the group can include wholly-owned resident companies, trusts and partnerships, and Australian bank branches of foreign banks.
There are additional special rules to deal with financing arrangements between associate entities that are not grouped.
For more information about grouping, see Consolidated groups and MEC groups.