ATO Interpretative Decision

ATO ID 2002/942

Income Tax

Thin Capitalisation
FOI status: may be released

On 8 April 2024, the Treasury Law Amendment (Making Multinationals Pay Their Fair Share - Integrity and Transparency) Act 2024 was enacted. The amendments apply to assessments for income years commencing on or after 1 July 2023, with the exception of new integrity rules (debt deduction creation rules) which apply in relation to assessments for income years starting on or after 1 July 2024.
Under the new thin capitalisation rules:

•
the newly classified 'general class investors' will be subject to one of 3 new tests

o
fixed ratio test

o
group ratio test

o
third party debt test

•
financial entities will continue to be subject to the existing safe harbour test and worldwide gearing test or may choose the new third party debt test

•
ADIs will continue to be subject to the previous thin capitalisation rules

•
the arm's length debt test has been removed for all taxpayers.

ADIs, securitisation vehicles and certain special purpose entities are excluded from the debt deduction creation rules.

Entities that are Australian plantation forestry entities are excluded from the new rules. For these entities, the previous rules will continue to apply.

CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

This ATOID provides you with the following level of protection:

If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.

Issue

For the purpose of calculating the attributable safe harbour excess amount in section 820-920(4) of the Income Tax Assessment Act 1997 ('ITAA 1997'), can a Step 1 amount, which is zero, when reduced by a negative adjusted average debt amount give rise to a positive Step 2 amount?

Decision

Yes. For the purpose of calculating the attributable safe harbour excess amount in section 820-920(4) of the ITAA 1997, a Step 1 amount, which is zero, when reduced by a negative adjusted average debt amount can give rise to a positive Step 2 amount.

Facts

Entity A has debt capital of $5m. Entity A holds 100% of the equity in Entity B. Entity B has equity of $5m and has not issued any debt interests. Entity B has lent $5m to associates entities in Australia. These entities are associate entities under a combination of the operation of sections 820-905(1)(b) and 820-905(3A) of the ITAA 1997.

Reasons for Decision Section 820-195 of the ITAA 1997 Safe Harbour Debt Amount - inward investment vehicle (general)

The safe harbour debt amount for Entity A is the result of the following method statement:

	$M
Step 1. Average value of all the assets of the entity	5
Step 2. Reduce the result of Step 1 by the average value of all associate entity debt of the entity	0
	5
Step 3. Reduce the result of Step 2 by the average value of all associate entity equity of the entity	(5)
	0
Step 4. Reduce the result of Step 3 by the average value of all the non-debt liabilities of the entity	0
	0
Step 5. Multiply the result of Step 4 by 3/4	0
Step 6. Add to the result the average value of the entity's associate entity excess amount ( see below)	5
Safe harbour debt amount	5

Sub-section 820-920(2) of the ITAA 1997 Associate entity excess amount (from step 6 of section 820-195 of the ITAA 1997)

For all steps in this subsection, Entity B is the associate entity.

The associate entity excess amount is calculated by applying the method statement in subsection 820-920(2).

	$M
Step 1. Work out the premium excess amount (from subsection(3)) for an associate entity.	0
Step 2. Add to the result of Step 1 the attributable safe harbour excess amount (subsection (4)) for that associate entity (see explanation below).	5
Step 3. Apply Steps 1 and 2 to all such associate entities. The result of this step is the associate entity excess amount.	5

The attributable safe harbour excess amount is calculated by applying the method statement in sub-section (4).

For all steps in this subsection, Entity B is the associate entity.

	$M
Step 1. Work out the safe harbour debt amount of the associate entity.	0
Step 2. Reduce the result of Step 1 by the value of the adjusted average debt of the associate entity.	(-5)
	5
Step 3. Multiply the result of Step 2 by the sum of:
(a) the value of all the equity capital of the associate entity that is attributable to the relevant entity; and ...	25
Step 4. Divide the result of Step 3 by the sum of:
(a) the value of all the equity capital of the associate entity; and ...	5
The result of this Step is the attributable safe harbour >excess amount	5

The method statement follows a mathematical approach. For example, in subsection 820-920(4) of the ITAA 1997, Step 3 of the method statement requires that the amount be 'multiplied' and at Step 4 that it be 'divided'. Following a mathematical approach, the term 'reduce' can be interpreted to mean 'subtract'. In applying the method statement in sub-section 820-920(4) of the ITAA 1997, where an amount is to be 'reduced' by a negative amount the result is a positive amount.

Date of decision: 13 August 2002

Year of income: Year ending 31 December 2002

Legislative References:
Income Tax Assessment Act 1997
   subdivision 820-I
   subsection 820-195
   subsection 820-920(2)
   subsection 820-920(4)

Keywords
Thin capitalisation
Safe harbour gearing ratio
Safe harbour debt amount
Attributable safe harbour excess amount

Siebel/TDMS Reference Number: DW442838

Business Line: Public Groups and International

Date of publication: 30 September 2002

ISSN: 1445-2782

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