Commonwealth Consolidated Acts

INCOME TAX ASSESSMENT ACT 1997 - SECT 820.300

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 (ADI) (see subsection   (2)); and

  (b)   the entity's * adjusted average equity capital (see subsection   (3)) is less than the entity's * minimum capital amount (see section   820 - 305).

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 - 325.

Note 3:   For the rules that apply to an entity that is an outward investing entity (ADI) for only part of an income year, see section   820 - 330 in conjunction with subsection   (2) of this section.

Note 4:   A consolidated group or MEC group may be an outward investing entity (ADI) to which this Subdivision applies: see Subdivisions   820 - FA and 820 - FB.

Outward investing entity (ADI)

  (2)   The entity is an outward investing entity (ADI) for a period that is all or a part of an income year if, and only if, throughout that period, the entity is an * ADI to which at least one of the following paragraphs applies:

  (a)   the entity is an * Australian controller of at least one * Australian controlled foreign entity (not necessarily the same Australian controlled foreign entity throughout that period);

  (b)   the entity is 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);

  (c)   the entity is:

  (i)   an Australian entity; and

  (ii)   an * associate entity of another entity that is an * outward investing 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.

Adjusted average equity capital

  (3)   The entity's adjusted average equity capital for an income year is:

  (a)   the average value, for that year, of all the * ADI equity capital of the entity (other than ADI equity capital attributable to its * overseas permanent establishments); minus

  (b)   the average value, for that year, of all the * controlled foreign entity equity of the entity (other than controlled foreign entity equity attributable to its overseas permanent establishments).

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

  (4)   For the purposes of paragraph   (3)(a), treat treasury shares (within the meaning of * accounting standard AASB 132) in the entity as included in the * ADI equity capital of the entity, to the extent that those shares are part of the entity's eligible tier 1 capital (within the meaning of the * prudential standards).