ATO ID 2002/942: Thin Capitalisation
Date of decision: 13 August 2002
Year of income: Year ending 31 December 2002
Business line: Public Groups and International

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
Summary: The safe harbour debt amount for Entity A is the result of the following method statement: | Detailed Reasoning - 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). 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. 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.

Legislative references: Income Tax Assessment Act 1997 subdivision 820-I subsection 820-195 subsection 820-920(2) subsection 820-920(4)
Subject references: Thin capitalisation Safe harbour gearing ratio Safe harbour debt amount Attributable safe harbour excess amount