INCOME TAX ASSESSMENT ACT 1997

CHAPTER 4 - INTERNATIONAL ASPECTS OF INCOME TAX  

PART 4-5 - GENERAL  

Division 820 - Thin capitalisation rules  

Subdivision 820-C - Thin capitalisation rules for inward investing entities (non-ADI)  

Operative provisions

SECTION 820-185   Thin capitalisation rule for inward investing entities (non-ADI)  

Thin capitalisation rule

820-185(1)  
This subsection disallows all or a part of each *debt deduction of an entity for an income year if:


(a) the entity is an *inward investing entity (non-ADI) for that year (see subsection (2)), but is not also an *outward investing entity (non-ADI) (see section 820-85 ) for all or any part of that year; and


(b) for that year, the entity ' s *adjusted average debt (see subsection (3)) exceeds its *maximum allowable debt (see section 820-190 ).

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 820-220 .

Note 3:

For the rules that apply to an entity that is an outward investing entity (non-ADI) as well as an inward investing entity (non-ADI), see Subdivision 820-B .

Note 4:

For the rules that apply to an entity that is an inward investing entity (non-ADI) for only a part of an income year, see section 820-225 in conjunction with subsection (2) of this section.

Note 5:

To calculate an average value for the purposes of this Division, see Subdivision 820-G .

Note 6:

A consolidated group or MEC group may be an inward investing entity (non-ADI) to which this Subdivision applies: see Subdivisions 820-FA and 820-FB .

Inward investing entity (non-ADI)

820-185(2)  
The entity is an inward 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 *inward investment vehicle (general) for that period (as set out in item 1 of the following table); or


(b) an *inward investment vehicle (financial) for that period (as set out in item 2 of that table); or


(c) an *inward investor (general) for that period (as set out in item 3 of that table); or


(d) an *inward investor (financial) for that period (as set out in item 4 of that table).


Inward investing entity (non-ADI)
Item If the entity is a: and the entity: the entity is an:
1 *foreign controlled Australian entity throughout a period that is all or a part of an income year is not a *financial entity, nor an *ADI, at any time during that period inward investment vehicle (general) for that period
2 *foreign controlled Australian entity throughout a period that is all or a part of an income year is a *financial entity throughout that period inward investment vehicle (financial) for that period
3 *foreign entity throughout a period that is all or a part of an income year is not a *financial entity, nor an *ADI, at any time during that period inward investor (general) for that period
4 *foreign entity throughout a period that is all or a part of an income year is a *financial entity throughout that period inward investor (financial) for that period

Note 1:

To determine whether an entity is a foreign controlled Australian entity, see Subdivision 820-H .

Note 2:

The rules that apply to these 4 types of entities are different in some instances. For example, see sections 820-195 to 820-210 .

Note 3:

An entity covered by item 3 or 4 of the table may be required to keep certain records, see Subdivision 820-L .

Adjusted average debt

820-185(3)  


The entity ' s adjusted average debt for an income year is the result of applying the method statement in this subsection. 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:

  • (a) if the entity is an *inward investment vehicle (general) or an *inward investment vehicle (financial) for that year - all the *associate entity debt of the entity; or
  • (b) if the entity is an *inward investor (general) or an *inward investor (financial) for that year - all the associate entity debt of the entity, to the extent that it is attributable to the entity ' s *Australian permanent establishments.

  • Step 3.

    If the entity is a *financial entity throughout the relevant year, add to the result of step 2 the average value, for the relevant year, of the entity ' s *borrowed securities amount.


    Step 4.

    Add to the result of step 3 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 .

    820-185(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.


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