The thin capitalisation provisions reduce certain expenditure (called 'debt deductions') incurred in obtaining and servicing debt where the debt used to finance the Australian operations of a partnership exceeds the limits set out in Division 820 of the ITAA 1997. These rules ensure that taxpayers fund their Australian operations with an appropriate amount of equity.
Do the thin capitalisation rules apply?
Subject to two exclusions listed below, the thin capitalisation rules will apply to a partnership if:
- the partnership has at least one partner which is an Australian resident (an Australian partnership) and either
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- the partnership, or any of its associate entities, is an Australian controller of an Australian controlled foreign entity (explained below) or carries on business overseas at or through a permanent establishment, or
- that partnership is foreign controlled, either directly or indirectly, or
- the partnership does not have any partners that are Australian residents and the partnership carries on business in Australia at or through a permanent establishment or otherwise has assets that produce assessable income.
Exclusions
The thin capitalisation rules will not apply if:
- the partnership's debt deductions (combined with the debt deductions of its associate entities) do not exceed $250,000 in the income year, or
- in the case of an Australian partnership which is not foreign controlled, the combined value of the partnership's Australian assets and the Australian assets of its associates comprise at least 90% of the value of the total assets of the partnership and those associates.
Control
The rules measuring control take into account both direct and indirect interests that the partnership holds in the other entity (or vice-versa), and the direct and indirect interests that associate entities of the partnership hold in the other entity. This means an Australian partnership can be an Australian controller of a foreign entity even if it holds a direct interest of less than 50% in the foreign entity.
What if the thin capitalisation rules apply?
If the thin capitalisation rules apply to the partnership or further information is required, see the Guide to thin capitalisation. If the thin capitalisation rules apply, the partnership must complete the Thin capitalisation schedule 2011 or the International dealings schedule - financial services 2011, unless the partnership was a subsidiary member of a consolidated group for the entire income year.
Where a partnership is a member of a consolidated group for the whole income year and the thin capitalisation rules apply, the responsibility for preparing the Thin capitalisation schedule 2011 or International dealings schedule - financial services 2011 will rest on the head company of the consolidated group.
Post the completed Thin capitalisation schedule to:
Australian Taxation Office
GPO Box 9845
[insert the name and postcode of your capital city]
For example;
Australian Taxation Office
GPO Box 9845
SYDNEY NSW 2001
Post the completed International dealings schedule - financial services to:
Australian Taxation Office
PO Box 3008
PENRITH NSW 2740
What if the thin capitalisation rules are breached?
If the thin capitalisation rules are breached, some of the partnership's debt deductions may be denied. The amount denied for business income is shown in B Expense reconciliation adjustments item 5. If the partnership incurred debt deductions for other types of income (for example, rental income, dividend income or foreign income) the amount of deductions shown at the relevant entries must exclude the debt deductions denied.