The Commissioner released Practical Compliance Guideline PCG 2018/1, on Wed 24.1.2018. It explains how the ATO will administer s820-300(3) of the ITAA 1997 (this is the thin capitalisation rule for outward investing banks/ADI’s and sits within Subdiv 820-D, which is the thin cap rules for outward investing entities).
This section (reproduced below):
- Applies to outward investing banks (Authorised Deposit taking Institutions).
- And denies Australian ‘debt deductions’ (viz: not ‘attributable’ to a foreign Permanent Establishment, where they would be counted towards its profit);
- If it’s ‘adjusted average equity capital’ (see below) is less than the ‘minimum capital amount’ (as defined in s820-305).
- The amount denied is determined by s820-325.
The definition of the ADI’s ‘adjusted average equity capital’, is define in ss(3) as, broadly
- The ADI’s ‘equity capital’ minus the ‘controlled foreign entity equity’.
- These are to be calculated as ‘averages’ under Subdiv 820-G.
- They also exclude exclude capital/equity attributed to foreign permanent establishments.
The ATO’s guidelines focus on 2 components of this formula:
- ADI equity capital attributable to an overseas PE; and
- controlled foreign entity equity attributable to an overseas PE.
The key feature of PCG 2018/1 is a “suggested proxy” for each attribution.
DATE OF EFFECT: income years commencing after 24 January 2018.
PCG 2018/1 was not previously released as a draft (although the ATO had earlier indicated that it would be).
28 January 2018
[ATO site: PCG 2018/1; LTN 16, 24/1/18; Tax Month January 2018]
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).