Commonwealth Consolidated Acts

INCOME TAX ASSESSMENT ACT 1997 - SECT 820.395

Thin capitalisation rule

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

  (a)   the entity is an * inward investing entity (ADI) (see subsection   (2)); and

  (b)   the entity's * average equity capital (see subsection   (3)) is less than its * minimum capital amount (see section   820 - 400);

to the extent that the debt deduction:

  (c)   is attributable to an * Australian permanent establishment of the entity at or through which it carries on its banking business; and

  (d)   is not an * allowable OB deduction.

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 - 415.

Note 3:   For the rules that apply to an entity that is an inward investing entity (ADI) for part of an income year, see section   820 - 420 in conjunction with subsection   (2) of this section.

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

Inward investing entity (ADI)

  (2)   The entity is an inward 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 a * foreign bank that carries on its banking business in Australia at or through one or more of its * Australian permanent establishments.

Note:   The entity is required to keep certain records, see Subdivision   820 - L.

  (2A)   However, the entity is not an inward investing entity (ADI) for a period that is all or a part of an income year if it is a * general class investor for that year.

  (2B)   Subsection   (2A) does not apply for the purposes of subsection   820 - 46(2) (definition of general class investor ).

Average equity capital

  (3)   The entity's average equity capital for an income year is the sum of the following:

  (a)   the average value, for that year, of the * ADI equity capital of the entity that:

  (i)   is attributable to the * Australian permanent establishments at or through which it carries on its banking business in Australia; but

  (ii)   has not been allocated to the * OB activities of the Australian permanent establishments;

  (b)   the average value, for that year, of the total amounts that:

  (i)   are made available by the entity to the Australian permanent establishments of the entity as loans to the Australian permanent establishments; and

  (ii)   do not give rise to any * debt deductions of the entity for that or any other income year.

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