Commonwealth: New Business Tax System (Thin Capitalisation) Act 2001 (Cth)

New Business Tax System (Thin Capitalisation) Act 2001 No. 162, 2001 New Business Tax System (Thin Capitalisation) Act 2001 No. 162, 2001 An Act to implement the New Business Tax System in relation to thin capitalisation, and for related purposes Contents 1 Short title................................... 2 Commencement............................... 3 Schedule(s).................................. Schedule 1—Thin capitalisation rules Part 1—New thin capitalisation rules Income Tax Assessment Act 1997 Part 2—Consequential and other amendments Income Tax Assessment Act 1936 Income Tax Assessment Act 1997 Income Tax (Transitional Provisions) Act 1997 Part 3—Application provisions Schedule 2—Dictionary amendments Income Tax Assessment Act 1997 New Business Tax System (Thin Capitalisation) Act 2001 No. 162, 2001 An Act to implement the New Business Tax System in relation to thin capitalisation, and for related purposes [Assented to 1 October 2001] The Parliament of Australia enacts: 1 Short title This Act may be cited as the New Business Tax System (Thin Capitalisation) Act 2001. 2 Commencement (1) Subject to subsections (2) and (3), this Act is taken to have commenced on 1 July 2001, immediately after the commencement of the New Business Tax System (Debt and Equity) Act 2001. (2) Items 17 and 19 of Schedule 1 are taken to have commenced on the later of: (a) 1 July 2001, immediately after the commencement of the New Business Tax System (Debt and Equity) Act 2001; or (b) the time when the Corporations Act 2001 commences. (3) Item 18 of Schedule 1 is taken to have commenced on the later of: (a) 1 July 2001, immediately after the commencement of the New Business Tax System (Debt and Equity) Act 2001; or (b) the time when Part 2 of the Financial Sector (Collection of Data) Act 2001 commences. 3 Schedule(s) Subject to section 2, each Act that is specified in a Schedule to this Act is amended or repealed as set out in the applicable items in the Schedule concerned, and any other item in a Schedule to this Act has effect according to its terms. Schedule 1—Thin capitalisation rules Part 1—New thin capitalisation rules Income Tax Assessment Act 1997 1 Chapter 4 Repeal the Chapter, substitute: Chapter 4—International aspects of income tax Part 4‑5—General [The next Division is Division 820.] Division 820—Thin capitalisation rules Table of Subdivisions Guide to Division 820 820‑A Preliminary 820‑B Thin capitalisation rules for outward investing entities (non‑ADI) 820‑C Thin capitalisation rules for inward investing entities (non‑ADI) 820‑D Thin capitalisation rules for outward investing entities (ADI) 820‑E Thin capitalisation rules for inward investing entities (ADI) 820‑F How this Division applies to resident TC groups 820‑G Calculating the average values 820‑H Control of entities 820‑I Associate entities 820‑J Equity interests in trusts and partnerships 820‑K Zero‑capital amounts 820‑L Record keeping requirements Guide to Division 820 820‑1 What this Division is about This Division applies to foreign controlled Australian entities, Australian entities that operate internationally and foreign entities that operate in Australia. Financing expenses that an entity can otherwise deduct from its assessable income may be disallowed under this Division in the following circumstances: • for an entity that is not an authorised deposit‑taking institution for the purposes of the Banking Act 1959 (an ADI)—the entity's debt exceeds the prescribed level (and the entity is therefore "thinly capitalised"); • for an entity that is an ADI—the entity's capital is less than the prescribed level (and the entity is therefore "thinly capitalised"). Table of sections 820‑5 Does this Division apply to an entity? 820‑10 Map of Division 820‑5 Does this Division apply to an entity? The following diagram shows you how to work out whether this Division applies to an entity. 820‑10 Map of Division The following table sets out a map of this Division. Map of Division Item This Subdivision: sets out: 1 Subdivision 820‑B or 820‑C (a) the meaning of maximum allowable debt for the Subdivision; and (b) how an entity covered by the Subdivision would have all or a part of its debt deductions disallowed if the maximum allowable debt is exceeded; and (c) the application of these rules in relation to a part of an income year. 2 Subdivision 820‑D or 820‑E (a) the meaning of minimum capital amount for the Subdivision; and (b) how an entity covered by the Subdivision would have all or a part of its debt deductions disallowed if the minimum capital amount is not reached; and (c) the application of these rules in relation to a part of an income year. 3 Subdivision 820‑F special rules to apply this Division to resident TC groups. 4 Subdivision 820‑G the methods of calculating the average value of a matter for the purposes of this Division. 5 Subdivision 820‑H the rules for determining: (a) whether or not an Australian entity controls a foreign entity (for the purposes of determining whether or not Subdivision 820‑B or 820‑D applies to that Australian entity); and (b) whether or not an Australian entity is controlled by a foreign entity (for the purposes of determining whether or not Subdivision 820‑C applies to that Australian entity). 6 Subdivision 820‑I the meaning of various concepts about associate entity for the purposes of this Division. 7 Subdivision 820‑J the meaning of equity interests in trusts and partnerships for the purposes of this Division. 8 Subdivision 820‑K the meaning of zero‑capital amount for the purposes of this Division. 9 Subdivision 820‑L special record keeping requirements for the purposes of this Division. [This is the end of the Guide.] Subdivision 820‑A—Preliminary Table of sections 820‑30 Object of Division 820‑35 Application—$250,000 threshold 820-37 Application—assets threshold 820‑40 Meaning of debt deduction 820‑30 Object of Division The Object of this Division is to ensure that the following entities do not reduce their tax liabilities by using an excessive amount of *debt capital to finance their Australian operations: (a) *Australian entities that operate internationally; (b) Australian entities that are foreign controlled; (c) *foreign entities that operate in Australia. 820‑35 Application—$250,000 threshold Subdivision 820‑B, 820‑C, 820‑D or 820‑E does not apply to disallow any *debt deduction of an entity for an income year if the total debt deductions of that entity and all its *associate entities for that year are $250,000 or less. 820‑37 Application—assets threshold Subdivision 820‑B, 820‑C, 820‑D or 820‑E does not apply to disallow any *debt deduction of an entity for an income year if: (a) the entity is an *outward investing entity (non‑ADI) or an *outward investing entity (ADI) for a period that is all or any part of that year; and (b) the entity is not also an *inward investing entity (non‑ADI) or an *inward investing entity (ADI) for all or any part of that period; and (c) the result of applying the following formula is equal to or greater than 0.9: where: average Australian assets of an entity is the average value, for that year, of all the assets of the entity, other than: (a) assets attributable to the entity's *overseas permanent establishment; or (b) assets comprised by the entity's *controlled foreign entity equity; or (c) assets comprised by the entity's *controlled foreign entity debt. average total assets of an entity means the average value, for that year, of all the assets of the entity. 820‑40 Meaning of debt deduction (1) Debt deduction, of an entity and for an income year, is a cost incurred by the entity in relation to a *debt interest issued by the entity, to the extent to which: (a) the cost is: (i) interest, an amount in the nature of interest, or any other amount that is calculated by reference to the time value of money; or (ii) the difference between the *financial benefits received, or to be received, by the entity under the *scheme giving rise to the debt interest and the financial benefits provided, or to be provided, under that scheme; or (iii) any amount directly incurred in obtaining or maintaining the financial benefits received, or to be received, by the entity under the scheme giving rise to the debt interest; or (iv) any other expense incurred by the entity that is specified in the regulations made for the purposes of this subparagraph; and (b) the entity can, apart from this Division, deduct the cost from its assessable income for that year; and (c) the cost is not incurred before 1 July 2001 if the entity can deduct it under section 25‑25. (2) A cost covered by paragraph (1)(a) includes, but is not limited to, any of the following: (a) an amount in substitution for interest; (b) a discount in respect of a security; (c) a fee or charge in respect of a debt, including application fees, line fees, service fees, brokerage and stamp duty in respect of document registration or security for the debt interest; (d) an amount that is taken under an *income tax law to be an amount of interest in respect of a lease, a hire purchase arrangement or any other *arrangement specified in that law; (e) any loss in respect of: (i) a reciprocal purchase agreement (otherwise known as a repurchase agreement); (ii) a sell‑buyback arrangement; (iii) a securities loan arrangement; (f) any amount covered by paragraph (1)(a) that has been assigned or is dealt with in any way on behalf of the party who would otherwise be entitled to that amount. (3) To avoid doubt, the following amounts that are incurred by an entity in relation to a *debt interest issued by the entity are not covered by paragraph (1)(a): (a) losses and outgoings directly associated with hedging or managing the financial risk in respect of the debt interest; (b) losses incurred by the entity in relation to which the following apply: (i) the losses would otherwise be a cost covered by subparagraph (1)(a)(ii); but (ii) the benefits mentioned in that subparagraph are measured in a foreign currency or a unit of account other than Australian currency (for example, ounces of gold) and the losses have arisen only because of changes in the rate of converting that foreign currency or that unit of account into Australian currency; (c) salary or wages; (d) rental expenses for a lease if the lease is not a debt interest; (e) an expense specified in the regulations made for the purposes of this paragraph. Subdivision 820‑B—Thin capitalisation rules for outward investing entities (non‑ADI) Guide to Subdivision 820‑B 820‑65 What this Subdivision is about This Subdivision sets out the thin capitalisation rules that apply to an Australian entity that has certain types of overseas investments and is not an authorised deposit‑taking institution (an ADI). These rules deal with the following matters: • how to work out the entity's maximum allowable debt for an income year; • how all or a part of the debt deductions claimed by the entity may be disallowed if the maximum allowable debt is exceeded; • how to apply these rules to a period that is less than an income year. Table of sections Operative provisions 820‑85 Thin capitalisation rule for outward investing entities (non‑ADI) 820‑90 Maximum allowable debt 820‑95 Safe harbour debt amount—outward investor (general) 820‑100 Safe harbour debt amount—outward investor (financial) 820‑105 Arm's length debt amount 820‑110 Worldwide gearing debt amount 820‑115 Amount of debt deduction disallowed 820‑120 Application to part year periods [This is the end of the Guide.] Operative provisions 820‑85 Thin capitalisation rule for outward investing entities (non‑ADI) Thin capitalisation rule (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 $250,000 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 resident TC group may be an outward investing entity (non‑ADI) to which this Subdivision applies, see Subdivision 820‑F. Outward investing entity (non‑ADI) (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). 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 any time 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 any time 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. Adjusted average debt (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 (other than any *controlled foreign 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 that year, of the entity's *zero‑capital amount, to the extent that: (a) the zero‑capital amount is attributable to the securities loan arrangements mentioned in step 1 of the method statement in subsection 820‑942(1); and (b) the securities loan arrangements are not *debt interests. Step 5. Add to the result of step 4 the average value, for the relevant year, of any *debt capital of the entity that does not give rise to any *debt deductions of the entity for that or any other income year, if: (a) the debt capital is comprised of *debt interests issued to another entity that remain *on issue; and (b) that other entity is an *outward investing entity (non‑ADI) or *inward investing entity (non‑ADI) for a period that is, or includes, all or a part of the relevant year; and (c) for the purposes of the application of this Division to the entities, and in relation to only that part of the period that falls within the relevant year, the entities do not use the same *valuation days and the same number of valuation days to calculate the average value of their respective debt capital. 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. (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. 820‑90 Maximum allowable debt Entity is not also an inward investment vehicle (general) or inward investment vehicle (financial) (1) The entity's maximum allowable debt for an income year is the greatest of the following amounts if the entity is not also an *inward investment vehicle (general) or an *inward investment vehicle (financial) for all or any part of that year: (a) the *safe harbour debt amount; (b) the *arm's length debt amount; (c) the *worldwide gearing debt amount. Note: The safe harbour debt amount and the worldwide gearing debt amount differ depending on whether the entity is an outward investor (general) or an outward investor (financial), see sections 820‑95, 820‑100 and 820‑110. Entity is also an inward investment vehicle (general) or inward investment vehicle (financial) (2) The entity's maximum allowable debt for an income year is the greater of the following amounts if the entity is also an *inward investment vehicle (general) or an *inward investment vehicle (financial) for all or any part of that year: (a) the *safe harbour debt amount; (b) the *arm's length debt amount. Note: The safe harbour debt amount differs depending on whether the entity is an outward investor (general) or an outward investor (financial), see sections 820‑95 and 820‑100. 820‑95 Safe harbour debt amount—outward investor (general) If the entity is an *outward investor (general) for the income year, the safe harbour debt amount is the result of applying the method statement in this section. 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 the income year, of all the assets of the entity. Step 2. Reduce the result of step 1 by the average value, for that year, of all the *associate entity debt of the entity, other than associate entity debt that is *controlled foreign entity debt of the entity. Step 3. Reduce the result of step 2 by the average value, for that year, of all the *associate entity equity of the entity, other than associate entity equity that is *controlled foreign entity equity of the entity. Step 4. Reduce the result of step 3 by the average value, for that year, of all the *controlled foreign entity debt of the entity. Step 5. Reduce the result of step 4 by the average value, for that year, of all the *controlled foreign entity equity of the entity. Step 6. Reduce the result of step 5 by the average value, for that year, of all the *non‑debt liabilities of the entity. If the result of this step is a negative amount, it is taken to be nil. Step 7. Multiply the result of step 6 by 3/4. Step 8. Add to the result of step 7 the average value, for that year, of the entity's *associate entity excess amount. The result of this step is the safe harbour debt amount. Example: AK Pty Ltd, a company that is an Australian entity, has an average value of assets (other than assets attributable to its overseas permanent establishments) of $100 million. The average values of its relevant associate entity debt, associate entity equity, controlled foreign entity debt, controlled foreign entity equity and non‑debt liabilities are $10 million, $8 million, $5 million, $2 million and $5 million respectively. Deducting these amounts from the result of step 1 (through the application of steps 2 to 6) leaves $70 million. Multiplying $70 million by 3/4 results in $52.5 million. As the average value of the company's associate entity excess amount is $4.5 million, the safe harbour debt amount is therefore $57 million. 820‑100 Safe harbour debt amount—outward investor (financial) (1) If the entity is an *outward investor (financial) for the income year, the safe harbour debt amount is the lesser of the following amounts: (a) the *total debt amount (worked out under subsection (2)); (b) the *adjusted on‑lent amount (worked out under subsection (3)). However, if the 2 amounts are equal, it is the total debt amount. Total debt amount (2) The total debt amount 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 the income year, of all the assets of the entity. Step 2. Reduce the result of step 1 by the average value, for that year, of all the *associate entity debt of the entity, other than associate entity debt that is *controlled foreign entity debt of the entity. Step 3. Reduce the result of step 2 by the average value, for that year, of all the *associate entity equity of the entity, other than associate entity equity that is *controlled foreign entity equity of the entity. Step 4. Reduce the result of step 3 by the average value, for that year, of all the *controlled foreign entity debt of the entity. Step 5. Reduce the result of step 4 by the average value, for that year, of all the *controlled foreign entity equity of the entity. Step 6. Reduce the result of step 5 by the average value, for that year, of all the *non‑debt liabilities of the entity. Step 7. Reduce the result of step 6 by the average value, for that year, of the entity's *zero‑capital amount. If the result of this step is a negative amount, it is taken to be nil. Step 8. Multiply the result of step 7 by 20/21. Step 9. Add to the result of step 8 the average value, for that year, of the entity's *zero‑capital amount. Step 10. Add to the result of step 9 the average value, for that year, of the entity's *associate entity excess amount. The result of this step is the total debt amount. Example: GLM Limited, a company that is an Australian entity, has an average value of assets (other than assets attributable to its overseas permanent establishments) of $160 million. The average values of its relevant associate entity debt, associate entity equity, controlled foreign entity debt, controlled foreign entity equity, non‑debt liabilities and zero capital amount are $5 million, $5 million, $9 million, $6 million, $5 million and $4 million respectively. Deducting these amounts from the result of step 1 (through applying steps 2 to 7) leaves $126 million. Multiplying $126 million by 20/21 results in $120 million. Adding the average zero capital amount of $4 million results in $124 million. As the company does not have any associate entity excess amount, the total debt amount is therefore $124 million. Adjusted on‑lent amount (3) The adjusted on‑lent amount 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 the income year, of all the assets of the entity. Step 2. Reduce the result of step 1 by the average value, for that year, of all the *associate entity equity of the entity, other than associate entity equity that is *controlled foreign entity equity of the entity. Step 3. Reduce the result of step 2 by the average value, for that year, of all the *controlled foreign entity debt of the entity. Step 4. Reduce the result of step 3 by the average value, for that year, of all the *controlled foreign entity equity of the entity. Step 5. Reduce the result of step 4 by the average value, for that year, of all the *non‑debt liabilities of the entity. Step 6. Reduce the result of step 5 by the amount (the average on‑lent amount) which is the average value, for that year, of the entity's *on‑lent amount (other than *controlled foreign entity debt of the entity). If the result of this step is a negative amount, it is taken to be nil. Step 7. Multiply the result of step 6 by 3/4. Step 8. Add to the result of step 7 the average on‑lent amount. Step 9. Reduce the result of step 8 by the average value, for that year, of all the *associate entity debt of the entity, other than associate entity debt that is *controlled foreign entity debt of the entity. Step 10. Add to the result of step 9 the average value, for that year, of the entity's *associate entity excess amount. The result of this step is the adjusted on‑lent amount. Example: GLM Limited, a company that is an Australian entity, has an average value of assets (other than assets attributable to its overseas permanent establishments) of $160 million. The average values of its relevant associate entity equity, controlled foreign entity debt, controlled foreign entity equity, non‑debt liabilities and on‑lent amount are $5 million, $9 million, $6 million, $5 million and $35 million respectively. Deducting these amounts from the result of step 1 (through applying steps 2 to 6) leaves $100 million. Multiplying $100 million by 3/4 results in $75 million. Adding the average on‑lent amount of $35 million results in $110 million. Reducing the result of step 8 by the associate entity debt amount of $5 million equals $105 million. As the company does not have any associate entity excess amount, the adjusted on‑lent amount is therefore $105 million. 820‑105 Arm's length debt amount (1) The arm's length debt amount is a notional amount that, having regard to the factual assumptions set out in subsection (2) and the relevant factors mentioned in subsection (3), would satisfy both paragraphs (a) and (b): (a) the amount represents a notional amount of *debt capital that: (i) the entity would reasonably be expected to have throughout the income year; and (ii) would give rise to an amount of *debt deductions of the entity for that or any other income year; and (iii) would be attributable to the entity's Australian business as mentioned in subsection (2); (b) commercial lending institutions that were not *associates of the entity (the notional lenders) would reasonably be expected to have entered into *schemes that would: (i) give rise to *debt interests that constituted that notional amount of debt capital of the entity; and (ii) provide for terms and conditions for the debt interests that would reasonably be expected to have applied if the entity and the notional lenders had been dealing at arm's length with each other throughout the income year mentioned in subparagraph (1)(a)(i). Note: The entity must keep records in accordance with section 820‑980 if the entity works out an amount under this section. Factual assumptions (2) Irrespective of what actually happened during that year, the following assumptions must be made in working out that amount: (a) the entity's commercial activities in connection with Australia (the Australian business) during that year do not include: (i) any *business carried on by the entity at or through its *overseas permanent establishments; and (ii) the holding of any *associate entity debt, *controlled foreign entity debt or *controlled foreign entity equity; and (b) the entity had carried on the Australian business that it actually carried on during that year; (c) the nature of the entity's assets and liabilities (to the extent that they are attributable to the Australian business) had been as they were during that year; (d) except as stated in paragraph (1)(b) and paragraph (e) of this subsection, the entity had carried on the Australian business in the same circumstances as what actually existed during that year; (e) any guarantee, security or other form of credit support provided to the entity in relation to the Australian business during that year: (i) by its *associates; or (ii) by the use of assets of the entity that are attributable to the entity's overseas permanent establishments; is taken not to have been received by the entity. Relevant factors (3) On the basis of the factual assumptions set out in subsection (2), the following factors must be taken into account in determining whether or not an amount satisfies paragraphs (1)(a) and (b): (a) the functions performed, the assets used, and the risks assumed, by the entity in relation to the Australian business throughout that year; (b) the terms and conditions of the *debt capital that the entity actually had in relation to the Australian business throughout that year; (c) the nature of, and title to, any assets of the entity attributable to the Australian business that were available to the entity throughout that year as security for its debt capital for that business; (d) the purposes for which *schemes for debt capital had been actually entered into by the entity in relation to the Australian business throughout that year; (e) the entity's capacity to meet all its liabilities in relation to the Australian business (whether during that year or at any other time); (f) the profit of the entity (within the meaning of the *accounting standards), and the return on its capital, in relation to the Australian business (whether during that year or at any other time); (g) the debt to equity ratios of the following throughout that year: (i) the entity; (ii) the entity in relation to the Australian business; (iii) each of the entity's *associate entities that engage in commercial activities similar to the Australian business; (h) the commercial practices adopted by independent parties dealing with each other at arm's length in the industry in which the entity carries on the Australian business throughout that year (whether in Australia or in comparable markets elsewhere); (i) the way in which the entity financed its commercial activities (other than the Australian business) throughout that year; (j) the general state of the Australian economy throughout that year; (k) all of the above factors existing at the time when the entity last entered into a scheme that gave rise to an actual *debt interest attributable to the Australian business that remains *on issue throughout that year; (l) any other factors which are specified in the regulations made for the purposes of this section, including factors specific to an *outward investor (general) or an *outward investor (financial). Commissioner's power (4) If the Commissioner considers an amount worked out by the entity under this section does not appropriately take into account the factual assumptions and the relevant factors, the Commissioner may substitute another amount that the Commissioner considers better reflects those assumptions and factors. 820‑110 Worldwide gearing debt amount Outward investor (general) (1) If the entity is an *outward investor (general) for the income year, the worldwide gearing debt amount is the result of applying the method statement in this subsection. Method statement Step 1. Divide the average value of all the entity's *worldwide debt for the income year by the average value of all the entity's *worldwide equity for that year. Step 2. Multiply the result of step 1 by 12/10. Step 3. Add 1 to the result of step 2. Step 4. Divide the result of step 2 by the result of step 3. Step 5. Multiply the result of step 4 in this method statement by the result of step 6 in the method statement in section 820‑95. Step 6. Add to the result of step 5 the average value, for that year, of the entity's *associate entity excess amount. The result of this step is the worldwide gearing debt amount. Example: AK Pty Ltd, a company that is an Australian entity, has an average value of worldwide debt of $83.4 million and an average value of worldwide equity of $27 million. The result of applying steps 1 and 2 is therefore 3.706. Dividing 3.706 by 4.706 (through applying steps 3 and 4) and multiplying the result by $70 million (which is the result of step 6 in the method statement in section 820‑95) equals $55.13 million. As the average value of the company's associate entity excess amount is $4.5 million, the worldwide gearing debt amount is therefore $59.63 million. Outward investor (financial) (2) If the entity is an *outward investor (financial) for that year, the worldwide gearing debt amount is the result of applying the method statement in this subsection. Method statement Step 1. Divide the average value of all the entity's *worldwide debt for the income year by the average value of all the entity's *worldwide equity for that year. Step 2. Multiply the result of step 1 by 12/10. Step 3. Add 1 to the result of step 2. Step 4. Divide the result of step 2 by the result of step 3. Step 5. Multiply the result of step 4 in this method statement by the result of step 7 in the method statement in subsection 820‑100(2). Step 6. Add to the result of step 5 the average value, for that year, of the entity's *zero‑capital amount (other than any zero‑capital amount that is attributable to the entity's *overseas permanent establishments). Step 7. Add to the result of step 6 the average value, for that year, of the entity's *associate entity excess amount. The result of this step is the worldwide gearing debt amount. Example: GLM Limited, a company that is an Australian entity, has an average value of worldwide debt of $120 million and an average value of worldwide equity of $40 million. The result of applying steps 1 and 2 is therefore 3.6. Dividing 3.6 by 4.6 (through applying steps 3 and 4) and multiplying the result by $126 million (which is the result of step 7 of the method statement in subsection 820‑100(2)) equals $98.61 million. The average value of zero‑capital amount (see step 7 of the method statement in subsection 820‑100(2)) is $4 million. Adding that amount to $98.61 million results in $102.61 million. As the company does not have any associate entity excess amount, the worldwide gearing debt amount is therefore $102.61 million. 820‑115 Amount of debt deduction disallowed The amount of *debt deduction disallowed under subsection 820‑85(1) is worked out using the following formula: where: average debt means the average value, for the income 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 (other than any debt capital attributable to any of the entity's *overseas permanent establishments). debt deduction means each *debt deduction covered by subsection 820‑85(1). excess debt means the amount by which the entity's *adjusted average debt for that year (see subsection 820‑85(3)) exceeds its *maximum allowable debt for that year. 820‑120 Application to part year periods (1) This subsection disallows all or a part of each *debt deduction of an entity for an income year that is an amount incurred by the entity during a period that is a part of that year (to the extent that it is not attributable to an *overseas permanent establishment of the entity), if: (a) the entity is an *outward investing entity (non‑ADI) for that period; and (b) the entity's *adjusted average debt for that period exceeds the entity's *maximum allowable debt for that period. Note: To determine whether an entity is an outward investing entity (non‑ADI) for that period, see subsection 820‑85(2). (2) The entity's adjusted average debt for that period 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 period, 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 that period, of all the *associate entity debt of the entity (other than any *controlled foreign entity debt of the entity). Step 3. Reduce the result of step 2 by the average value, for that period, of all the *controlled foreign entity debt of the entity. Step 4. If the entity is a *financial entity throughout that period, add to the result of step 3 the average value, for that period, of the entity's *zero‑capital amount, to the extent that: (a) the zero‑capital amount is attributable to the securities loan arrangements mentioned in step 1 of the method statement in subsection 820‑942(1); and (b) the securities loan arrangements are not *debt interests. Step 5. Add to the result of step 4 the average value, for that period (the relevant period), of any *debt capital of the entity that does not give rise to any *debt deductions of the entity for that or any other income year, if: (a) the debt capital is comprised of *debt interests issued to another entity that remain *on issue; and (b) that other entity is an *outward investing entity (non‑ADI) or *inward investing entity (non‑ADI) for a period that is, or includes, all or a part of the relevant period; and (c) for the purposes of the application of this Division to the entities, and in relation to only that part of the period that falls within the relevant period, the entities do not use the same *valuation days and the same number of valuation days to calculate the average value of their respective debt capital. The result of this step is the adjusted average debt. (3) The entity's *adjusted average debt does not exceed its *maximum allowable debt if the adjusted average debt is nil or a negative amount. (4) For the purposes of determining: (a) the *maximum allowable debt for the period mentioned in subsection (1); and (b) the amount of each *debt deduction to be disallowed; sections 820‑90 to 820‑115 apply in relation to that entity and that period with the modifications set out in the following table: Modifications of sections 820‑90 to 820‑115 Item Provisions Modifications 1 Sections 820‑90 to 820‑115 A reference to an income year is taken to be a reference to that period 3 Section 820‑115 A reference to subsection 820‑85(1) is taken to be a reference to subsection (1) of this section 4 Section 820‑115 adjusted average debt is taken to have the meaning given by subsection (2) of this section average debt is taken to be the average value referred to in step 1 of the method statement in subsection (2) of this section Subdivision 820‑C—Thin capitalisation rules for inward investing entities (non‑ADI) Guide to Subdivision 820‑C 820‑180 What this Subdivision is about This Subdivision sets out the thin capitalisation rules that apply to a foreign entity or a foreign controlled Australian entity that is not an authorised deposit‑taking institution (an ADI). These rules deal with the following matters: • how to work out the entity's maximum allowable debt for an income year; • how all or a part of the debt deductions claimed by the entity may be disallowed if the maximum allowable debt is exceeded; • how to apply these rules to a period that is less than an income year. Table of sections Operative provisions 820‑185 Thin capitalisation rule for inward investing entities (non‑ADI) 820‑190 Maximum allowable debt 820‑195 Safe harbour debt amount—inward investment vehicle (general) 820‑200 Safe harbour debt amount—inward investment vehicle (financial) 820‑205 Safe harbour debt amount—inward investor (general) 820‑210 Safe harbour debt amount—inward investor (financial) 820‑215 Arm's length debt amount 820‑220 Amount of debt deduction disallowed 820‑225 Application to part year periods [This is the end of the Guide.] Operative provisions 820‑185 Thin capitalisation rule for inward investing entities (non‑ADI) Thin capitalisation rule (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 $250,000 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 resident TC group may be an inward investing entity (non‑ADI) to which this Subdivision applies, see Subdivision 820‑F. Inward investing entity (non‑ADI) (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 (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 that year, of the entity's *zero‑capital amount, to the extent that: (a) the zero‑capital amount is attributable to the securities loan arrangements mentioned in step 1 of the method statement in subsection 820‑942(1); and (b) the securities loan arrangements are not *debt interests. Step 4. Add to the result of step 3 the average value, for the relevant year, of any *debt capital of the entity that does not give rise to any *debt deductions of the entity for that or any other income year, if: (a) the debt capital is comprised of *debt interests issued to another entity that remain *on issue; and (b) that other entity is an *outward investing entity (non‑ADI) or *inward investing entity (non‑ADI) for a period that is, or includes, all or a part of the relevant year; and (c) for the purposes of the application of this Division to the entities, and in relation to only that part of the relevant year that falls within that period, the entities do not use the same *valuation days and the same number of valuation days to calculate the average value of their respective debt capital. 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. (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. 820‑190 Maximum allowable debt The entity's maximum allowable debt for an income year is the greater of the following amounts: (a) the *safe harbour debt amount; (b) the *arm's length debt amount. Note: The safe harbour debt amount differs depending on whether the entity is an inward investment vehicle (general), inward investment vehicle (financial), inward investor (general) or inward investor (financial), see sections 820‑195 to 820‑215. 820‑195 Safe harbour debt amount—inward investment vehicle (general) If the entity is an *inward investment vehicle (general) for the income year, the safe harbour debt amount is the result of applying the method statement in this section. Method statement Step 1. Work out the average value, for the income year, of all the assets of the entity. Step 2. Reduce the result of step 1 by the average value, for that year, of all the *associate entity debt of the entity. Step 3. Reduce the result of step 2 by the average value, for that year, of all the *associate entity equity of the entity. Step 4. Reduce the result of step 3 by the average value, for that year, of all the *non‑debt liabilities of the entity. If the result of this step is a negative amount, it is taken to be nil. Step 5. Multiply the result of step 4 by 3/4. Step 6. Add to the result of step 5 the average value, for that year, of the entity's *associate entity excess amount. The result of this step is the safe harbour debt amount. Example: ALWZ Ltd, a company that is an Australian entity, has an average value of assets of $100 million. The average values of its associate entity debt, associate entity equity and non‑debt liabilities are $10 million, $5 million and $5 million respectively. Deducting these amounts from the result of step 1 (through applying steps 2 to 4) leaves $80 million. Multiplying $80 million by 3/4 results in $60 million. As the average value of the company's associate entity excess amount is $2 million, the safe harbour debt amount is therefore $62 million. 820‑200 Safe harbour debt amount—inward investment vehicle (financial) (1) If the entity is an *inward investment vehicle (financial) for the income year, the safe harbour debt amount is the lesser of the following amounts: (a) the *total debt amount (worked out under subsection (2)); (b) the *adjusted on‑lent amount (worked out under subsection (3)). However, if the 2 amounts are equal, it is the total debt amount. Total debt amount (2) The total debt amount is the result of the method statement in this subsection. Method statement Step 1. Work out the average value, for the income year, of all the assets of the entity. Step 2. Reduce the result of step 1 by the average value, for that year, of all the *associate entity debt of the entity. Step 3. Reduce the result of step 2 by the average value, for that year, of all the *associate entity equity of the entity. Step 4. Reduce the result of step 3 by the average value, for that year, of all the *non‑debt liabilities of the entity. Step 5. Reduce the result of step 4 by the average value, for that year, of the entity's *zero‑capital amount. If the result of this step is a negative amount, it is taken to be nil. Step 6. Multiply the result of step 5 by 20/21. Step 7. Add to the result of step 6 the average value, for that year, of the entity's *zero‑capital amount. Step 8. Add to the result of step 7 the average value, for that year, of the entity's *associate entity excess amount. The result of this step is the total debt amount. Example: KJW Finance Pty Ltd, a company that is an Australian entity, has an average value of assets of $120 million. The average values of its associate entity debt, associate entity equity, its non‑debt liabilities and its zero‑capital amount are $5 million, $3 million, $2 million and $5 million respectively. Deducting these amounts from the result of step 1 (through applying steps 2 to 5) leaves $105 million. Multiplying $105 million by 20/21 results in $100 million. Adding the zero‑capital amount of $5 million to $100 million results in $105 million. As the company does not have any associate entity excess amount, the total debt amount is therefore $105 million. Adjusted on‑lent amount (3) The adjusted on‑lent amount is the result of applying the method statement in this subsection. Method statement Step 1. Work out the average value, for the income year, of all the assets of the entity. Step 2. Reduce the result of step 1 by the average value, for that year, of all the *associate entity equity of the entity. Step 3. Reduce the result of step 2 by the average value, for that year, of all the *non‑debt liabilities of the entity. Step 4. Reduce the result of step 3 by the amount (the average on‑lent amount) which is the average value, for that year, of the entity's *on‑lent amount. If the result of this step is a negative amount, it is taken to be nil. Step 5. Multiply the result of step 4 by 3/4. Step 6. Add to the result of step 5 the average on‑lent amount. Step 7. Reduce the result of step 6 by the average value, for that year, of all the *associate entity debt of the entity. Step 8. Add to the result of step 7 the average value, for that year, of the entity's *associate entity excess amount. The result of this step is the adjusted on‑lent amount. Example: KJW Finance Pty Ltd, a company that is an Australian entity, has an average value of assets of $120 million. The average values of its associate entity equity, non‑debt liabilities and on‑lent amount are $3 million, $2 million and $35 million respectively. Deducting these amounts from the result of step 1 (through applying steps 2 to 4) leaves $80 million. Multiplying $80 million by 3/4 results in $60 million. Adding the average on‑lent amount of $35 million results in $95 million. Reducing $95 million by the associate entity debt amount of $5 million results in $90 million. As the company does not have any associate entity excess amount, the adjusted on‑lent amount is therefore $90 million. 820‑205 Safe harbour debt amount—inward investor (general) If the entity is an *inward investor (general) for the income year, the safe harbour debt amount is the result of applying the method statement in this section. Method statement Step 1. Work out the average value, for the income year, of all of the following assets of the entity (the Australian investments): (a) assets that are attributable to the entity's *Australian permanent establishments; (b) other assets that are held for the purposes of producing the entity's assessable income. Step 2. Reduce the result of step 1 by the average value, for that year, of all the *associate entity debt of the entity that has arisen because of the Australian investments. Step 3. Reduce the result of step 2 by the average value, for that year, of all the *associate entity equity of the entity that has arisen because of the Australian investments. Step 4. Reduce the result of step 3 by the average value, for that year, of all the *non‑debt liabilities of the entity that have arisen because of the Australian investments. If the result of this step is a negative amount, it is taken to be nil. Step 5. Multiply the result of step 4 by 3/4. Step 6. Add to the result of step 5 the average value, for that year, of the entity's *associate entity excess amount. The result of this step is the safe harbour debt amount. Example: RJ Corporation is a company that is not an Australian entity. The average value of its Australian investments is $100 million. The average value of its relevant associate entity debt, associate entity equity and non‑debt liabilities is $10 million, $5 million and $5 million respectively. Deducting those amounts from the result of step 1 leaves $80 million. Multiplying $80 million by 3/4 results in $60 million. As the company does not have any associate entity excess amount, the safe harbour debt amount is therefore $60 million. 820‑210 Safe harbour debt amount—inward investor (financial) (1) If the entity is an *inward investor (financial) for that year, the safe harbour debt amount is the lesser of the following amounts: (a) the *total debt amount (worked out under subsection (2)); (b) the *adjusted on‑lent amount (worked out under subsection (3)). However, if the 2 amounts are equal, it is the total debt amount. Total debt amount (2) The total debt amount is the result of applying the method statement in this subsection. Method statement Step 1. Work out the average value, for the income year, of all of the following assets of the entity (the Australian investments): (a) assets that are attributable to the entity's *Australian permanent establishments; (b) other assets that are held for the purposes of producing the entity's assessable income. Step 2. Reduce the result of step 1 by the average value, for that year, of all the *associate entity debt of the entity that has arisen because of the Australian investments. Step 3. Reduce the result of step 2 by the average value, for that year, of all the *associate entity equity of the entity that has arisen because of the Australian investments. Step 4. Reduce the result of step 3 by the average value, for that year, of all the *non‑debt liabilities of the entity that have arisen because of the Australian investments. Step 5. Reduce the result of step 4 by the average value, for that year, of the entity's *zero‑capital amount that has arisen because of the Australian investments. If the result of this step is a negative amount, it is taken to be nil. Step 6. Multiply the result of step 5 by 20/21. Step 7. Add to the result of step 6 the average value, for that year, of the entity's *zero‑capital amount that has arisen because of the Australian investments. Step 8. Add to the result of step 7 the average value, for that year, of the entity's *associate entity excess amount. The result of this step is the total debt amount. Example: FXS Financial SA is a company that is not an Australian entity. The average value of its Australian investments is $120 million. The average value of its relevant associate entity debt, associate entity equity, non‑debt liabilities and zero‑capital amount are $5 million, $2 million, $3 million and $5 million respectively. Deducting those amounts from the result of step 1 (through applying steps 2 to 5) leaves $105 million. Multiplying $105 million by 20/21 results in $100 million. Adding the average zero‑capital amount of $5 million results in $105 million. As the company does not have any associate entity excess amount, the total debt amount is therefore $105 million. Adjusted on‑lent amount (3) The adjusted on‑lent amount is the result of applying the method statement in this subsection. Method statement Step 1. Work out the average value, for the income year, of all of the following assets of the entity (the Australian investments): (a) assets that are attributable to the entity's *Australian permanent establishments; (b) other assets that are held for the purposes of producing the entity's assessable income. Step 2. Reduce the result of step 1 by the average value, for that year, of all the *associate entity equity of the entity that has arisen because of the Australian investments. Step 3. Reduce the result of step 2 by the average value, for that year, of all the *non‑debt liabilities of the entity that has arisen because of the Australian investments. Step 4. Reduce the result of step 3 by the amount (the average on‑lent amount) which is the average value, for that year, of the *on‑lent amount of the entity (to the extent that it is the value of all or a part of the Australian investments). If the result of this step is a negative amount, it is taken to be nil. Step 5. Multiply the result of step 4 by 3/4. Step 6. Add to the result of step 5 the average on‑lent amount. Step 7. Reduce the result of step 6 by the average value, for that year, of all the *associate entity debt of the entity that has arisen because of the Australian investments. If the result of this step is a negative amount, it is taken to be nil. Step 8. Add to the result of step 7 the average value, for that year, of the entity's *associate entity excess amount. The result of this step is the adjusted on‑lent amount. Example: FXS Financial SA is a company that is not an Australian entity. The average value of its Australian investments is $120 million. The average value of its relevant associate entity equity, non‑debt liabilities and on‑lent amount are $2 million, $3 million and $35 million respectively. Deducting those amounts from the result of step 1 (through applying steps 2 to 4) leaves $80 million. Multiplying $80 million by 3/4 results in $60 million. Adding the average on‑lent amount of $35 million results in $95 million. Reducing the result of step 6 by the associate entity debt amount of $5 million results in $90 million. As the company does not have any associate entity excess amount, the adjusted on‑lent amount is therefore $90 million. 820‑215 Arm's length debt amount (1) The arm's length debt amount is a notional amount that, having regard to the factual assumptions set out in subsection (2) and the relevant factors mentioned in subsection (3), would satisfy both paragraphs (a) and (b): (a) the amount represents a notional amount of *debt capital that: (i) the entity would reasonably be expected to have throughout the income year; and (ii) would give rise to an amount of *debt deductions of the entity for that or any other income year; and (iii) would be attributable to the entity's Australian business as mentioned in subsection (2); (b) commercial lending institutions that were not *associates of the entity (the notional lenders) would reasonably be expected to have entered into *schemes that would: (i) give rise to *debt interests that constituted that notional amount of debt capital of the entity; and (ii) provide for terms and conditions for the debt interests that would reasonably be expected to have applied if the entity and the notional lenders had been dealing at arm's length with each other throughout the income year mentioned in subparagraph (1)(a)(i). Note: The entity must keep records in accordance with section 820‑980 if the entity works out an amount under this section. Factual assumptions (2) Irrespective of what actually happened during that year, the following assumptions must be made in working out that amount: (a) the entity's commercial activities in connection with Australia (the Australian busine