Income Tax Assessment Act 1997

CHAPTER 4 - INTERNATIONAL ASPECTS OF INCOME TAX  

PART 4-5 - GENERAL  

Division 820 - Thin capitalisation rules  

Subdivision 820-G - Calculating the average values  

How to calculate the average values

SECTION 820-645   The frequent measurement method  

820-645(1)  
An entity that uses the frequent measurement method for a period (the measurement period ) must calculate the average value of a matter for that period by applying:


(a) the method statement in subsection (2) (generally based on quarterly periods); or


(b) the method statement in subsection (4) (generally based on regular intervals).

This section does not prevent the entity from applying the method statement in subsection (2) for one matter and the method statement in subsection (4) for another matter in relation to that period.

820-645(2)  
This is the method statement for the purposes of paragraph (1)(a). Method statement


Step 1.

Work out the value of the particular matter as at each of the following measurement days:

  • (a) the first day of the measurement period;
  • (b) the last day of each quarterly period of that income year (see subsection (3)) that occurs during the measurement period (if any);
  • (c) the last day of the measurement period if it is not a day covered by paragraph (b).

  • Step 2.

    Add up those values.


    Step 3.

    Divide the result of step 2 by the number of measurement days. The result of this step is the average value.

    Example:

    KJW Finance Corporation, a company that is an Australian entity, held assets valued at $130 million on the first day of an income year. On the last day of each quarterly period for that year it held assets valued at $140 million, $120 million, $110 million and $100 million respectively. Adding these amounts and dividing the result by 5 gives the average value of its assets for that year, which is $120 million.

    Quarterly period

    820-645(3)  
    The quarterly periods of the income year are:


    (a) the period consisting of the first, second and third months of that year; and


    (b) each successive period of 3 months that occurs after that period during that year.

    820-645(4)  
    This is the method statement for the purposes of paragraph (1)(b): Method statement


    Step 1.

    Work out the value of the particular matter as at each of the following measurement days:

  • (a) the first day of the measurement period;
  • (b) the last day of each regular interval for the measurement period (see subsection (5));
  • (c) the last day of the measurement period if it is not a day mentioned in paragraph (b).

  • Step 2.

    Add up those values.


    Step 3.

    Divide the result of step 2 by the number of measurement days. The result of this step is the average value.

    Example:

    TW Corporation, a company that is an Australian entity, adopts a weekly interval for the purposes of this subsection. The measurement period is a period of 12 weeks. On the first day of that period it had $70 million of debt capital. Its debt capital was $80 million on the last day of each of the first 7 weeks, and $95 million on the last day of the remaining 5 weeks. Adding these amounts and dividing the result by 13 (the number of measurement days) gives the average value of its debt capital for that period, which is $85 million.

    Regular intervals

    820-645(5)  
    The regular intervals for the measurement period are:


    (a) a period which consists of a fixed number of days or months (not less than one day and not more than 3 months) adopted by the entity and begins at the start of the first day of the measurement period; and


    (b) each successive period of the same duration that occurs during the measurement period.

    Note:

    Examples of a regular interval therefore include a daily, weekly, fortnightly, monthly or quarterly interval.

    820-645(6)  
    The entity must use the same regular intervals when calculating the average values of different matters under subsection (4) for that period.


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