CHAPTER 4
-
INTERNATIONAL ASPECTS OF INCOME TAX
History
Chapter 4 inserted by No 162 of 2001.
PART 4-5
-
GENERAL
History
Part 4-5 inserted by No 162 of 2001.
Division 820
-
Thin capitalisation rules
History
Division 820 inserted by No 162 of 2001.
Subdivision 820-B
-
Thin capitalisation rules for outward investing financial entities (non-ADI)
History
Subdiv 820-B heading amended by No 23 of 2024, s 3 and Sch 2 item 30, by inserting
"
financial
"
, effective 1 July 2024. For application provisions, see note under s
705-60
.
Subdiv 820-B inserted by No 162 of 2001.
Operative provisions
SECTION 820-85
Thin capitalisation rule for outward investing financial entities (non-ADI)
Thin capitalisation rule
820-85(1A)
Subsection
(1)
applies if:
(a)
an entity is an
*
outward investing financial entity (non-ADI) (see subsection
(2)
) for all of an income year; and
(b)
either:
(i)
the entity has made a choice under subsection
(2C)
in relation to the income year; or
(ii)
otherwise
-
the entity
'
s
*
adjusted average debt (see subsection
(3)
) for the income year exceeds its
*
maximum allowable debt (see section
820-90
) for the income year.
Note:
This Subdivision does not apply if the total debt deductions of that entity and all its associate entities for that year are
$
2 million or less, see section
820-35
.
History
S 820-85(1A) inserted by No 23 of 2024, s 3 and Sch 2 item 33, effective 1 July 2024. For application provisions, see note under s
705-60
.
820-85(1)
This subsection disallows:
(a)
if paragraph
(1A)(b)(i)
applies
-
all or part of the entity
'
s
*
debt deductions for the income year (to the extent that they are not attributable to an
*
overseas permanent establishment of the entity); or
(b)
if paragraph
(1A)(b)(ii)
applies
-
all or a part of each debt deduction of the entity for the income year (to the extent that it is not attributable to an overseas permanent establishment of the entity).
Note 1:
To work out the amount to be disallowed, see section
820-115
.
Note 2:
For the rules that apply to an entity that is an outward investing financial entity (non-ADI) for only a part of an income year, see section
820-120
in conjunction with subsection
(2)
of this section.
Note 3:
A consolidated group or MEC group may be an outward investing financial entity (non-ADI) to which this Subdivision applies: see Subdivisions
820-FA
and
820-FB
.
History
S 820-85(1) substituted by No 23 of 2024, s 3 and Sch 2 item 33, effective 1 July 2024. For application provisions, see note under s
705-60
. S 820-85(1) formerly read:
820-85(1)
This subsection disallows all or a part of each
*
debt deduction of an entity for an income year (to the extent that it is not attributable to an
*
overseas permanent establishment of the entity) if, for that year:
(a)
the entity is an
*
outward investing entity (non-ADI) (see subsection (2)); and
(b)
the entity
'
s
*
adjusted average debt (see subsection (3)) exceeds its
*
maximum allowable debt (see section 820-90).
Note 1:
This Subdivision does not apply if the total debt deductions of that entity and all its associate entities for that year are
$
2 million or less, see section 820-35.
Note 2:
To work out the amount to be disallowed, see section 820-115.
Note 3:
For the rules that apply to an entity that is an outward investing entity (non-ADI) for only a part of an income year, see section 820-120 in conjunction with subsection (2) of this section.
Note 4:
A consolidated group or MEC group may be an outward investing entity (non-ADI) to which this Subdivision applies: see Subdivisions 820-FA and 820-FB.
S 820-85(1) amended by No 110 of 2014, s 3 and Sch 1 item 23, by substituting
"
$
2 million
"
for
"
$
250,000
"
in note 1, applicable to assessments for income years starting on or after 1 July 2014.
S 820-85(1) amended by
No 101 of 2006
, s 3 and Sch 2 item 751, by substituting note 4, effective 14 September 2006. For application and savings provisions see the
CCH Australian Income Tax Legislation archive
. Note 4 formerly read:
Note 4:
A resident TC group may be an outward investing entity (non-ADI) to which this Subdivision applies, see Subdivision
820-F
.
Outward investing financial entity (non-ADI)
820-85(2)
The entity is an
outward investing financial entity (non-ADI)
for a period that is all or a part of an income year if, and only if, it is an
*
outward investor (financial) for that period (according to the items of the following table).
|
Outward investing financial entity (non-ADI)
|
|
Item
|
If:
|
and:
|
then:
|
| 1 |
the entity (the
relevant entity
) is one or both of the following throughout a period that is all or a part of an income year: |
the relevant entity is a
*
financial entity throughout that period |
the relevant entity is an
outward investing financial entity (non-ADI)
for that period |
| |
(a) |
an
*
Australian controller of at least one
*
Australian controlled foreign entity (not necessarily the same Australian controlled foreign entity throughout that period); |
|
|
| |
(b) |
an Australian entity that carries on a
*
business at or through at least one
*
overseas permanent establishment (not necessarily the same permanent establishment throughout that period) |
|
|
| 2 |
(a) |
the entity (the
relevant entity
) is an
*
Australian entity throughout a period that is all or a part of an income year; and |
the relevant entity is a
*
financial entity throughout that period |
the relevant entity is an
outward investing financial entity (non-ADI)
for that period |
| |
(b) |
throughout that period, the relevant entity is an
*
associate entity of another Australian entity; and |
|
|
| |
(c) |
that other Australian entity is an
*
outward investing financial entity (non-ADI) or an
*
outward investing entity (ADI) for that period |
|
|
Note:
To determine whether an entity is an Australian controller of an Australian controlled foreign entity, see Subdivision
820-H
.
History
S 820-85(2) substituted by No 23 of 2024, s 3 and Sch 2 item 33, effective 1 July 2024. For application provisions, see note under s
705-60
. S 820-85(2) formerly read:
Outward investing entity (non-ADI)
820-85(2)
The entity is an
outward investing entity (non-ADI)
for a period that is all or a part of an income year if, and only if, it is:
(a)
an
*
outward investor (general) for that period (as set out in items 1 and 3 of the following table); or
(b)
an
*
outward investor (financial) for that period (as set out in items 2 and 4 of that table).
(Table: Outward investing entity (non-ADI))
(Table: Outward investing entity (non-ADI))
|
Outward investing entity (non-ADI)
|
|
Item
|
If:
|
and:
|
then:
|
| 1 |
the entity (the
relevant entity
) is one or both of the following throughout a period that is all or a part of an income year: |
the relevant entity is not a
*
financial entity, nor an
*
ADI, at anytime during that period |
the relevant entity is an
outward investor (general)
for that period |
| |
(a) |
an
*
Australian controller of at least one
*
Australian controlled foreign entity (not necessarily the same Australian controlled foreign entity throughout that period); |
|
|
| |
(b) |
an Australian entity that carries on a
*
business at or through at least one
*
overseas permanent establishment (not necessarily the same permanent establishment throughout that period) |
|
|
| 2 |
the entity (the
relevant entity
) satisfies this column in item 1 |
the relevant entity is a
*
financial entity throughout that period |
the relevant entity is an
outward investor (financial)
for that period |
| 3 |
(a) |
the entity (the
relevant entity
) is an
*
Australian entity throughout a period that is all or a part of an income year; and |
the relevant entity is not a
*
financial entity, nor an
*
ADI, at anytime during that period |
the relevant entity is an
outward investor (general)
for that period |
| |
(b) |
throughout that period, the relevant entity is an
*
associate entity of another Australian entity; and |
|
|
| |
(c) |
that other Australian entity is an
*
outward investing entity (non-ADI) or an
*
outward investing entity (ADI) for that period |
|
|
| 4 |
the entity (the
relevant entity
) and another Australian entity satisfy this column in item 3 |
the relevant entity is a
*
financial entity throughout that period |
the relevant entity is an
outward investor (financial)
for that period |
Note 1:
To determine whether an entity is an Australian controller of an Australian controlled foreign entity, see Subdivision 820-H.
Note 2:
The rules that apply to an outward investor (general) are different from those that apply to an outward investor (financial) in some instances. For example, see sections 820-95 and 820-100.
820-85(2A)
However, the entity is
not
an
outward investing financial entity (non-ADI)
for a period that is all or a part of an income year if it is a
*
general class investor for that year.
History
S 820-85(2A) inserted by No 23 of 2024, s 3 and Sch 2 item 33, effective 1 July 2024. For application provisions, see note under s
705-60
.
820-85(2B)
Subsection
(2A)
does not apply for the purposes of subsection
820-46(2)
(definition of
general class investor
).
History
S 820-85(2B) inserted by No 23 of 2024, s 3 and Sch 2 item 33, effective 1 July 2024. For application provisions, see note under s
705-60
.
820-85(2BA)
For the purposes of item 2 of the table in subsection
(2)
of this section, assume that the other
*
Australian entity is a
*
financial entity for all of the income year.
History
S 820-85(2BA) inserted by No 136 of 2024, s 3 and Sch 6 item 12, effective 1 January 2025 and applicable in relation to an income year starting on or after 1 July 2023.
820-85(2C)
An entity that is an
*
outward investing financial entity (non-ADI) for a period that is all or part of an income year may make a choice under this subsection to apply the third party debt test in relation to that income year.
History
S 820-85(2C) inserted by No 23 of 2024, s 3 and Sch 2 item 33, effective 1 July 2024. For application provisions, see note under s
705-60
.
820-85(2D)
Section
820-47
applies in relation to a choice under subsection
(2C)
in the same way that it applies in relation to a choice under subsection
820-46(3)
or
(4)
.
History
S 820-85(2D) inserted by No 23 of 2024, s 3 and Sch 2 item 33, effective 1 July 2024. For application provisions, see note under s
705-60
.
Adjusted average debt
820-85(3)
The entity
'
s
adjusted average debt
for an income year is the result of applying the method statement in this subsection. In applying the method statement, disregard any amount that is attributable to the entity
'
s
*
overseas permanent establishments.
Method statement
Step 1.
Work out the average value, for that year (the
relevant year
), of all the
*
debt capital of the entity that gives rise to
*
debt deductions of the entity for that or any other income year.
Step 2.
Reduce the result of step 1 by the average value, for the relevant year, of all the
*
associate entity debt of the entity.
Step 3.
Reduce the result of step 2 by the average value, for the relevant year, of all the
*
controlled foreign entity debt of the entity.
Step 4.
If the entity is a
*
financial entity throughout the relevant year, add to the result of step 3 the average value, for the relevant year, of the entity
'
s
*
borrowed securities amount.
Step 5.
Add to the result of step 4 the average value, for the relevant year, of the
*
cost-free debt capital of the entity. The result of this step is the
adjusted average debt
.
Note:
To calculate an average value for the purposes of this Division, see Subdivision
820-G
.
History
S 820-85(3) amended by No 142 of 2003 and No 53 of 2002.
820-85(4)
The entity
'
s
*
adjusted average debt does not exceed its
*
maximum allowable debt if the adjusted average debt is nil or a negative amount.
History
S 820-85 inserted by No 162 of 2001.
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