Income Tax Assessment Act 1997

s 802-17 — Trust estates and foreign resident beneficiaries—exempting CFI from Australian tax

Foreign resident beneficiaries (1) So much of a share of the net income of a trust as is reasonably attributable to the whole or a part of the * unfranked part of a * frankable distribution made by an * Australian corporate tax entity that the entity declares, in its * distribution statement, to be * conduit foreign income: (a) is not assessable income and is not * exempt income of a beneficiary of the trust who: (i) is a foreign resident; and (ii) is presently entitled to the share of the income of the trust; and (b) is an amount to which section 128B (Liability to withholding tax) of the Income Tax Assessment Act 1936 does not apply. Note: A frankable distribution to which a part of the net income of a trust is reasonably attributable may be made by the Australian corporate tax entity to the trust directly, or to the trust indirectly through one or more interposed trusts. (2) The declaration must be made on or before the day on which the * distribution is made. Note: For a private company, this rule may bring forward the time at which the company is required to make its distribution statement: see section 202 ‑ 75. Trusts (3) The trustee of a trust is not to be assessed (and pay tax) under section 98, 99 or 99A of the Income Tax Assessment Act 1936 in respect of so much of the net income of the trust as is * non ‑ assessable non ‑ exempt income of a beneficiary of the trust under subsection (1).

Amendment history: Inserted by No 79 of 2007, effective Schedule 1 (items 28, 29, 39–42, 43(1), (6)), Schedules 3, 4, Schedule 6 (items 3–8), Schedule 9 (items 14–26, 30, 34) and Schedule 10 (items 10–13, 32): Royal Assent Schedule 8 (items 2, 12–25, 26(1)–(3)): 1 July 2007

s 802-20 — Distributions between Australian corporate tax entities—non ‑ assessable non ‑ exempt income

(1) An * Australian corporate tax entity (the receiving entity ) has an amount that is not assessable income and is not * exempt income for an income year if: (a) it receives from another Australian corporate tax entity a * frankable distribution that has an * unfranked part; and (b) the * distribution statement for the * distribution declares an amount (a received CFI amount ) of the unfranked part to be * conduit foreign income; and (c) the receiving entity, after the start of the income year but before the due day for lodging its * income tax return for that income year: (i) makes a frankable distribution that has an unfranked part; and (ii) declares an amount (a declared CFI amount ) of the unfranked part to be conduit foreign income. (2) The amount that is not assessable income and is not * exempt income is the lesser of: (a) the sum of the received CFI amounts that the receiving entity receives during the income year (the total received CFI amounts ); and (b) the amount worked out using this formula: where: related expenses means the receiving entity’s expenses that are reasonably related to the total received CFI amounts. total declared CFI amounts means the sum of the declared CFI amounts in distributions made by the receiving entity before the due day for lodging its * income tax return for the income year. Example: AusCo 1 and AusCo 2 are both Australian corporate tax entities. AusCo 1 pays an unfranked dividend of $80 to AusCo 2. AusCo 1 declares all of the $80 to be its conduit foreign income (so the $80 is a received CFI amount). AusCo 2 has $5 of deductible expenses relating to the $80 dividend. AusCo 2 pays an unfranked dividend of $30. AusCo 2 declares $15 of the $30 to be conduit foreign income (so the $15 is a declared CFI amount). The amount that is not assessable income and is not exempt income for AusCo 2 (assuming there are no other received CFI amounts or declared CFI amounts) is: The remaining $64 is included in AusCo 2’s assessable income and it can deduct $4 (the part of the expenses related to the $64). (3) If the receiving entity’s expenses that are reasonably related to the total received CFI amounts equal or exceed the total received CFI amounts for an income year, the total received CFI amounts is not assessable income and is not * exempt income of the receiving entity for the income year. (4) If a declared CFI amount is taken into account in working out an amount of * non ‑ assessable non ‑ exempt income of an entity for an income year, that amount cannot be taken into account for the entity for a later income year. (5) Work out how much * conduit foreign income in a * frankable distribution flows through a trust or a partnership in the same way that you work out the * share of a * franking credit on a * franked distribution that flows through a trust or a partnership. That amount is treated as a received CFI amount under this section. Note: See sections 207 ‑ 50, 207 ‑ 55 and 207 ‑ 57 for the share of a franking credit on a franked distribution that flows through a trust or a partnership.

Amendment history: Inserted by No 147 of 2005, effective Schedule 1 (items 4–168, 169(2), 170–176), Schedule 2 (items 1, 12–24, 26–28), Schedule 3, Schedule 4 (items 4–12), Schedule 5 (items 13, 14, 20), Schedule 6 (items 1, 2, 10(1)) and Schedule 7 (items 14–16, 20): Royal Assent

s 802-25 — Conduit foreign income of an Australian corporate tax entity

An * Australian corporate tax entity’s conduit foreign income at a particular time (the relevant time ) is worked out by applying sections 802 ‑ 30 to 802 ‑ 55. Note: Subdivision 715 ‑ U modifies the single entity and the entry history rule for the purposes of working out conduit foreign income for consolidated groups and MEC groups.

Amendment history: Inserted by No 147 of 2005, effective Schedule 1 (items 4–168, 169(2), 170–176), Schedule 2 (items 1, 12–24, 26–28), Schedule 3, Schedule 4 (items 4–12), Schedule 5 (items 13, 14, 20), Schedule 6 (items 1, 2, 10(1)) and Schedule 7 (items 14–16, 20): Royal Assent

s 802-30 — Foreign source income amounts

(1) Work out the amount of the entity’s * ordinary income and * statutory income derived by the entity that has been, is or will be included in an income statement or similar statement of the entity or of another entity and that would not be included in the entity’s assessable income if the entity: (a) for a company or a * corporate limited partnership—were a foreign resident at the relevant time; or (b) for a * public trading trust—were not a * resident unit trust for the income year in which the relevant time occurs. Note: Income statements are prepared under the Framework for the Preparation and Presentation of Financial Statements (which is referred to in the Australian Accounting Standards). (2) Reduce the subsection (1) amount by any part of that amount that is or will be included in the entity’s assessable income (apart from section 802 ‑ 20). (3) Add to the amount remaining after subsection (2) these amounts: (a) if the entity receives from another * Australian corporate tax entity a * frankable distribution that has an * unfranked part—any amount declared in the * distribution statement for that * distribution to be * conduit foreign income; (b) an amount that is treated as a received CFI amount for the purposes of section 802 ‑ 20 because of subsection 802 ‑ 20(5); (c) an amount that is * non ‑ assessable non ‑ exempt income under section 768 ‑ 5 and that would be not be included under subsection (1). (4) Reduce the amount remaining after subsection (3) by these amounts: (a) an amount that is * non ‑ assessable non ‑ exempt income under section 23AI or 23AK of the Income Tax Assessment Act 1936 ; (b) an amount that is not included in the entity’s assessable income because of the operation of paragraph 99B(2)(e) of that Act; (c) the amount worked out using the formula: where: available franking credit means any part of the amount remaining after subsection (3) to the extent to which a * franking credit arises or will arise for the entity. (5) Reduce the amount remaining after subsection (4) by any of the entity’s expenses that are reasonably related to that amount, except expenses the entity has deducted or can deduct under this Act. In applying this subsection to an amount covered by paragraph (3)(a), assume that amount is * non ‑ assessable non ‑ exempt income. (6) The result is an amount included in the entity’s conduit foreign income . (7) This section applies to an entity as if it had derived an amount if the amount has been applied for its benefit (including by discharging all or part of a debt it owes) or as it directs.

Amendment history: Inserted by No 147 of 2005, effective Schedule 1 (items 4–168, 169(2), 170–176), Schedule 2 (items 1, 12–24, 26–28), Schedule 3, Schedule 4 (items 4–12), Schedule 5 (items 13, 14, 20), Schedule 6 (items 1, 2, 10(1)) and Schedule 7 (items 14–16, 20): Royal Assent | Amended by No 97 of 2008, effective Sch 1 (items 3–12) and Sch 3 (items 44–173, 189): 3 Oct 2008 (s 2(1) items 2, 3–5) | Amended by No 110 of 2014, effective Sch 1 and Sch 2 (items 2–5, 13–23): 17 Oct 2014 (s 2(1) item 2) Sch 3, Sch 4 (items 1, 3) and Sch 5 (items 16–67, 74–76, 84–91, 98–121): 16 Oct 2014 (s 2(1) items 3–5, 7) | Amended by No 53 of 2016, effective Sch 1 (item 1), Sch 2, Sch 3 (items 2–4), Sch 4 (items 1–5), Sch 5 (items 2, 29–67, 75), Sch 6 (items 21–34), Sch 8 (item 1) and Sch 9: 5 May 2016 (s 2(1) items 2, 4)

s 802-35 — Capital gains and losses

Capital gains (1) The entity’s conduit foreign income includes these amounts: (a) the amount by which a * capital gain of the entity is reduced because of the operation of section 768 ‑ 505; (b) a capital gain that is disregarded because of the operation of subsection 23AH(3) of the Income Tax Assessment Act 1936 ; (c) the amount of a capital gain that is disregarded as a result of the operation of an * international tax sharing treaty. Capital losses (2) The entity’s conduit foreign income is reduced by these amounts: (a) the amount by which a * capital loss of the entity is reduced because of the operation of section 768 ‑ 505; (b) a capital loss that is disregarded because of the operation of subsection 23AH(4) of the Income Tax Assessment Act 1936 ; (c) the amount of a capital loss that is disregarded as a result of the operation of an * international tax sharing treaty. Timing rule (3) The adjustments are made under this section at the end of the income year in which the * CGT event occurred.

Amendment history: Inserted by No 147 of 2005, effective Schedule 1 (items 4–168, 169(2), 170–176), Schedule 2 (items 1, 12–24, 26–28), Schedule 3, Schedule 4 (items 4–12), Schedule 5 (items 13, 14, 20), Schedule 6 (items 1, 2, 10(1)) and Schedule 7 (items 14–16, 20): Royal Assent | Amended by No 101 of 2013, effective Sch 2 (items 2, 20–43, 50): 29 June 2013 (s 2(1) item 3) Sch 2 (items 55–57): 8 Sept 2012 (s 2(1) item 4)

s 802-40 — Effect of foreign income tax offset on conduit foreign income

The entity’s conduit foreign income includes an amount if a tax offset arose for the entity under Division 770 for the income year immediately before the one in which the relevant time occurs. The amount is worked out using the formula:

Amendment history: Inserted by No 147 of 2005, effective Schedule 1 (items 4–168, 169(2), 170–176), Schedule 2 (items 1, 12–24, 26–28), Schedule 3, Schedule 4 (items 4–12), Schedule 5 (items 13, 14, 20), Schedule 6 (items 1, 2, 10(1)) and Schedule 7 (items 14–16, 20): Royal Assent | Amended by No 143 of 2007, effective Schedule 1 (items 1, 4, 128–194, 222, 223, 225, 226), Schedule 2, Schedule 5 (items 1–16, 48(1)–(3)), Schedule 6 and Schedule 7 (items 18–68): Royal Assent Schedule 5 (items 31–46): 15 Mar 2007 (s 2(1) item 6) | Amended by No 97 of 2008, effective Sch 1 (items 3–12) and Sch 3 (items 44–173, 189): 3 Oct 2008 (s 2(1) items 2, 3–5)

s 802-45 — Previous declarations of conduit foreign income

The entity’s conduit foreign income is reduced if: (a) the entity makes a * frankable distribution that has an * unfranked part; and (b) the entity declares an amount of the unfranked part to be conduit foreign income. The amount of the reduction is the amount so declared. Note: If the amount declared is less than the amount available for declaration, the difference is available for a later declaration.

Amendment history: Inserted by No 147 of 2005, effective Schedule 1 (items 4–168, 169(2), 170–176), Schedule 2 (items 1, 12–24, 26–28), Schedule 3, Schedule 4 (items 4–12), Schedule 5 (items 13, 14, 20), Schedule 6 (items 1, 2, 10(1)) and Schedule 7 (items 14–16, 20): Royal Assent

s 802-50 — Receipt of an unfranked distribution from another Australian corporate tax entity

(1) The entity’s conduit foreign income is reduced if: (a) the entity (the receiving entity ) receives from another * Australian corporate tax entity a * frankable distribution that has an * unfranked part; and (b) the * distribution statement for the * distribution declares an amount (the declared amount ) of the unfranked part to be conduit foreign income; and (c) some or all of the declared amount is not * non ‑ assessable non ‑ exempt income under section 802 ‑ 20. (2) The amount of the reduction is the amount that is not * non ‑ assessable non ‑ exempt income under section 802 ‑ 20 less any expenses reasonably related to that amount.

Amendment history: Inserted by No 147 of 2005, effective Schedule 1 (items 4–168, 169(2), 170–176), Schedule 2 (items 1, 12–24, 26–28), Schedule 3, Schedule 4 (items 4–12), Schedule 5 (items 13, 14, 20), Schedule 6 (items 1, 2, 10(1)) and Schedule 7 (items 14–16, 20): Royal Assent

s 802-55 — No double benefits

An amount cannot be both: (a) an unfranked non ‑ portfolio dividend credit for an entity under section 46FB of the Income Tax Assessment Act 1936 ; and (b) counted towards: (i) the entity’s * conduit foreign income; and (ii) the entity’s * non ‑ assessable non ‑ exempt income under section 802 ‑ 20.

Amendment history: Inserted by No 147 of 2005, effective Schedule 1 (items 4–168, 169(2), 170–176), Schedule 2 (items 1, 12–24, 26–28), Schedule 3, Schedule 4 (items 4–12), Schedule 5 (items 13, 14, 20), Schedule 6 (items 1, 2, 10(1)) and Schedule 7 (items 14–16, 20): Royal Assent

s 802-60 — No streaming of distributions

(1) Subsection (2) has effect if: (a) an * Australian corporate tax entity makes one or more * frankable distributions in a * franking period; and (b) at least one of the * distributions has an * unfranked part; and (c) the entity declares an amount of the unfranked part to be * conduit foreign income. (2) If the entity does not, for that * franking period, declare the same proportion of * conduit foreign income for all * membership interests and * non ‑ share equity interests then, instead of the amount that it declared to be conduit foreign income on those * distributions, it is taken to have declared under section 802 ‑ 45 the greater amount that it would have declared had it declared that same proportion on all those distributions. Note: Breaching subsection (2) may make the entity subject to a penalty under section 288 ‑ 80 in Schedule 1 to the Taxation Administration Act 1953 (about over declaring conduit foreign income). Example: There are 10,000 membership interests in AusCo Limited, 7,500 held by foreign residents and 2,500 held by Australian residents. It has $1,800 of conduit foreign income. AusCo makes an unfranked distribution of 50 cents per membership interest to all of its members. It declares $1,500 of the distribution to be conduit foreign income for its 7,500 foreign membership interests (20 cents per membership interest or 40% of each distribution) and none for its Australian membership interests. AusCo is taken to have declared the same proportion (40% of each distribution) of conduit foreign income for its Australian membership interests (which amounts to $500 of conduit foreign income). It is therefore taken to have declared $2,000 of conduit foreign income. This is an over ‑ declaration of $200 and a penalty under section 288 ‑ 80 in Schedule 1 to the Taxation Administration Act 1953 will apply. (3) For the purposes of subsection (2), ignore * membership interests and * non ‑ share equity interests that do not carry a right to receive * distributions (other than distributions on winding up). (4) Despite subsection (2), an entity that receives a * frankable distribution that has an * unfranked part is entitled to rely on the * distribution statement made by the entity that made the distribution.

Amendment history: Inserted by No 147 of 2005, effective Schedule 1 (items 4–168, 169(2), 170–176), Schedule 2 (items 1, 12–24, 26–28), Schedule 3, Schedule 4 (items 4–12), Schedule 5 (items 13, 14, 20), Schedule 6 (items 1, 2, 10(1)) and Schedule 7 (items 14–16, 20): Royal Assent

s 815-1 — What this Subdivision is about

The cross ‑ border transfer pricing rules in this Subdivision are equivalent to, but independent of, the transfer pricing rules in Australia’s double tax agreements. Table of sections Operative provisions 815 ‑ 5 Object 815 ‑ 10 Transfer pricing benefit may be negated 815 ‑ 15 When an entity gets a transfer pricing benefit 815 ‑ 20 Cross ‑ border transfer pricing guidance 815 ‑ 25 Modified transfer pricing benefit for thin capitalisation 815 ‑ 30 Determinations negating transfer pricing benefit 815 ‑ 35 Consequential adjustments 815 ‑ 40 No double taxation

Amendment history: Inserted by No 115 of 2012, effective Sch 1 (items 5–11): 8 Sept 2012(s 2)

s 815-5 — Object

The object of this Subdivision is to ensure the following amounts are appropriately brought to tax in Australia, consistent with the arm’s length principle: (a) profits which would have accrued to an Australian entity if it had been dealing at * arm’s length, but, by reason of non ‑ arm’s length conditions operating between the entity and its foreign associated entities, have not so accrued; (b) profits which an Australian permanent establishment (within the meaning of the relevant * international tax agreement) of a foreign entity might have been expected to make if it were a distinct and separate entity engaged in the same or similar activities under the same or similar conditions, but dealing wholly independently.

Amendment history: Inserted by No 115 of 2012, effective Sch 1 (items 5–11): 8 Sept 2012(s 2)

s 815-10 — Transfer pricing benefit may be negated

(1) The Commissioner may make a determination mentioned in subsection 815 ‑ 30(1), in writing, for the purpose of negating a * transfer pricing benefit an entity gets. Treaty requirement (2) However, this section only applies to an entity if: (a) the entity gets the * transfer pricing benefit under subsection 815 ‑ 15(1) at a time when an * international tax agreement containing an * associated enterprises article applies to the entity; or (b) the entity gets the transfer pricing benefit under subsection 815 ‑ 15(2) at a time when an international tax agreement containing a * business profits article applies to the entity. Note: This Subdivision does not apply to income years to which Subdivisions 815 ‑ B and 815 ‑ C apply: see section 815 ‑ 1 of the Income Tax (Transitional Provisions) Act 1997 .

Amendment history: Inserted by No 115 of 2012, effective Sch 1 (items 5–11): 8 Sept 2012(s 2) | Amended by No 101 of 2013, effective Sch 2 (items 2, 20–43, 50): 29 June 2013 (s 2(1) item 3) Sch 2 (items 55–57): 8 Sept 2012 (s 2(1) item 4)

s 815-15 — When an entity gets a transfer pricing benefit

Transfer pricing benefit—associated enterprises (1) An entity gets a transfer pricing benefit if: (a) the entity is an Australian resident; and (b) the requirements in the * associated enterprises article for the application of that article to the entity are met; and (c) an amount of profits which, but for the conditions mentioned in the article, might have been expected to accrue to the entity, has, by reason of those conditions, not so accrued; and (d) had that amount of profits so accrued to the entity: (i) the amount of the taxable income of the entity for an income year would be greater than its actual amount; or (ii) the amount of a tax loss of the entity for an income year would be less than its actual amount; or (iii) the amount of a * net capital loss of the entity for an income year would be less than its actual amount. The amount of the transfer pricing benefit is the difference between the amounts mentioned in subparagraph (d)(i), (ii) or (iii) (as the case requires). Transfer pricing benefit—business profits (2) A foreign resident entity gets a transfer pricing benefit if: (a) the entity has a permanent establishment (within the meaning of the * international tax agreement) in Australia; and (b) the amount of profits attributed to the permanent establishment falls short of the amount of profits the permanent establishment might be expected to make if it were a distinct and separate entity engaged, and dealing, in the manner mentioned in the * business profits article; and (c) had the profits attributed to the permanent establishment included that shortfall: (i) the amount of the taxable income of the entity for an income year would be greater than its actual amount; or (ii) the amount of a tax loss of the entity for an income year would be less than its actual amount; or (iii) the amount of a * net capital loss of the entity for an income year would be less than its actual amount. The amount of the transfer pricing benefit is the difference between the amounts mentioned in subparagraph (c)(i), (ii) or (iii) (as the case requires). Nil amounts (3) For the purposes of working out whether an entity gets a * transfer pricing benefit, and of negating that benefit under subsection 815 ‑ 30(1): (a) treat an entity that has no taxable income for an income year as having a taxable income for the year of a nil amount; and (b) treat an entity that has no tax loss for an income year as having a tax loss for the year of a nil amount; and (c) treat an entity that has no * net capital loss for an income year as having a net capital loss for the year of a nil amount. Multiple transfer pricing benefits (4) To avoid doubt, an entity may get 2 or more * transfer pricing benefits, in one or more income years, in relation to one amount of profits, or one shortfall of profits. Meaning of associated enterprises article (5) An associated enterprises article is: (a) Article 9 of the United Kingdom convention (within the meaning of the International Tax Agreements Act 1953 ); or (b) a corresponding provision of another * international tax agreement. Meaning of business profits article (6) A business profits article is: (a) Article 7 of the United Kingdom convention (within the meaning of the International Tax Agreements Act 1953 ); or (b) a corresponding provision of another * international tax agreement.

Amendment history: Inserted by No 115 of 2012, effective Sch 1 (items 5–11): 8 Sept 2012(s 2)

s 815-20 — Cross ‑ border transfer pricing guidance

(1) For the purpose of determining the effect this Subdivision has in relation to an entity: (a) work out whether an entity gets a * transfer pricing benefit consistently with the documents covered by this section, to the extent the documents are relevant; and (b) interpret a provision of an * international tax agreement consistently with those documents, to the extent they are relevant. (2) The documents covered by this section are as follows: (a) the Model Tax Convention on Income and on Capital, and its Commentaries, as adopted by the Council of the Organisation for Economic Cooperation and Development and last amended on 22 July 2010; (b) the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, as approved by that Council and last amended on 22 July 2010; (c) a document, or part of a document, prescribed by the regulations for the purposes of this paragraph. (3) However, a document, or a part of a document, mentioned in paragraph (2)(a) or (b) is not covered by this section if the regulations so prescribe. (4) Regulations made for the purposes of paragraph (2)(c) or subsection (3) may prescribe different documents or parts of documents for different circumstances.

Amendment history: Inserted by No 115 of 2012, effective Sch 1 (items 5–11): 8 Sept 2012(s 2)

s 815-25 — Modified transfer pricing benefit for thin capitalisation

(1) This section modifies the * transfer pricing benefit an entity gets, or apart from this section would get, in an income year if: (a) Division 820 (about thin capitalisation) applies to the entity for the income year; and (b) the transfer pricing benefit relates to profits, or a shortfall of profits, referable to costs that are * debt deductions of the entity for the income year. (2) If working out what those costs might have been, or might be expected to be, involves applying a rate to a * debt interest: (a) work out the rate by applying section 815 ‑ 15, having regard to section 815 ‑ 20; but (b) apply the rate to the debt interest the entity actually issued. Note: Division 820 may apply to further reduce debt deductions.

Amendment history: Inserted by No 115 of 2012, effective Sch 1 (items 5–11): 8 Sept 2012(s 2)

s 815-30 — Determinations negating transfer pricing benefit

(1) The determinations the Commissioner may make are as follows: (a) a determination of an amount by which the taxable income of the entity for an income year is increased; (b) a determination of an amount by which the tax loss of the entity for an income year is decreased; (c) a determination of an amount by which the * net capital loss of the entity for an income year is decreased. (2) If the Commissioner makes a determination under subsection (1), the determination is taken to be attributable, to the relevant extent, to such of the following as the Commissioner may determine: (a) an increase of a particular amount in assessable income of the entity for an income year under a particular provision of this Act; (b) a decrease of a particular amount in particular deductions of the entity for an income year; (c) an increase of a particular amount in particular capital gains of the entity for an income year; (d) a decrease of a particular amount in particular capital losses of the entity for an income year. (3) If the Commissioner makes a determination under subsection (1), the Commissioner must make a determination under subsection (2), unless it is not possible or practicable for the Commissioner to do so. Example: If section 815 ‑ 25 is relevant in working out the transfer pricing benefit an entity gets, this subsection requires the Commissioner to make a determination relating to the debt deductions of the entity. (4) Nothing done under subsection (2) affects the validity of a determination made under subsection (1). (5) The Commissioner may take such action as the Commissioner considers necessary to give effect to a determination under this section. (6) The Commissioner must give a copy of a determination under this section to the entity. (7) A failure to comply with subsection (6) does not affect the validity of the determination.

Amendment history: Inserted by No 115 of 2012, effective Sch 1 (items 5–11): 8 Sept 2012(s 2) | Amended by No 81 of 2016, effective Sch 1 (items 2–6, 26–32, 36), Sch 2 (items 1–8, 13–18, 20), Sch 3 (items 1–5, 9), Sch 5–8, Sch 9 (items 1–3, 5), Sch 10 (items 72–80, 93) and Sch 11: 1 Jan 2017 (s 2(1) items 2, 4, 6, 9) Sch 10 (items 2–27, 49–54): 1 July 2018 (s 2(1) item 5)

s 815-35 — Consequential adjustments

Consequential adjustment—associated enterprises (1) The Commissioner may make a determination under subsection (4) in relation to an entity (the disadvantaged entity ) if: (a) the Commissioner makes a determination under subsection 815 ‑ 30(1) in relation to a * transfer pricing benefit an entity gets under subsection 815 ‑ 15(1); and (b) the Commissioner considers that, but for the conditions mentioned in the * associated enterprises article: (i) the amount of the taxable income of the disadvantaged entity for an income year might have been expected to be less than its actual amount; or (ii) the amount of a * tax loss of the disadvantaged entity for an income year might have been expected to be greater than its actual amount; or (iii) the amount of a * net capital loss of the disadvantaged entity for an income year might have been expected to be greater than its actual amount; or (iv) an amount of * withholding tax payable in respect of interest or royalties by the disadvantaged entity might have been expected to be less than its actual amount; and (c) the Commissioner considers that it is fair and reasonable that the actual amount mentioned in subparagraph (b)(i), (ii), (iii) or (iv) (as the case requires) be adjusted accordingly. Consequential adjustment—business profits (2) The Commissioner may make a determination under subsection (4) in relation to an entity (the disadvantaged entity ) if: (a) the Commissioner makes a determination under subsection 815 ‑ 30(1) in relation to a * transfer pricing benefit an entity gets under subsection 815 ‑ 15(2); and (b) the Commissioner considers that, if the permanent establishment were a distinct and separate entity engaged, and dealing, in the manner mentioned in the * business profits article: (i) the amount of the taxable income of the disadvantaged entity for an income year might have been expected to be less than its actual amount; or (ii) the amount of a * tax loss of the disadvantaged entity for an income year might have been expected to be greater than its actual amount; or (iii) the amount of a * net capital loss of the disadvantaged entity for an income year might have been expected to be greater than its actual amount; or (iv) an amount of * withholding tax payable in respect of interest or royalties by the disadvantaged entity might have been expected to be less than its actual amount; and (c) the Commissioner considers that it is fair and reasonable that the actual amount mentioned in subparagraph (b)(i), (ii), (iii) or (iv) (as the case requires) be adjusted accordingly. Nil amounts (3) For the purposes of this section: (a) treat an entity that has no taxable income for an income year as having a taxable income for the year of a nil amount; and (b) treat an entity that has no tax loss for an income year as having a tax loss for the year of a nil amount; and (c) treat an entity that has no * net capital loss for an income year as having a net capital loss for the year of a nil amount. Consequential adjustment—determinations (4) The Commissioner may make one or more of the following determinations, in writing, for the purpose of adjusting an amount as mentioned in paragraph (1)(c) or (2)(c): (a) a determination of an amount by which the taxable income of the disadvantaged entity for an income year is decreased; (b) a determination of an amount by which the tax loss of the disadvantaged entity for an income year is increased; (c) a determination of an amount by which the * net capital loss of the disadvantaged entity for an income year is increased; (d) a determination of an amount by which the * withholding tax payable by the disadvantaged entity in respect of interest or royalties is decreased. (5) The Commissioner may take such action as the Commissioner considers necessary to give effect to a determination under this section. (6) The Commissioner must give a copy of a determination under this section to the disadvantaged entity. (7) A failure to comply with subsection (6) does not affect the validity of the determination. (9) An entity may give the Commissioner a written request to make a determination under this section relating to the entity. The Commissioner must decide whether or not to grant the request, and give the entity notice of the Commissioner’s decision. (10) If the entity is dissatisfied with the Commissioner’s decision, the entity may object, in the manner set out in Part IVC of the Taxation Administration Act 1953 , against that decision.

Amendment history: Inserted by No 115 of 2012, effective Sch 1 (items 5–11): 8 Sept 2012(s 2) | Amended by No 101 of 2013, effective Sch 2 (items 2, 20–43, 50): 29 June 2013 (s 2(1) item 3) Sch 2 (items 55–57): 8 Sept 2012 (s 2(1) item 4) | Amended by No 81 of 2016, effective Sch 1 (items 2–6, 26–32, 36), Sch 2 (items 1–8, 13–18, 20), Sch 3 (items 1–5, 9), Sch 5–8, Sch 9 (items 1–3, 5), Sch 10 (items 72–80, 93) and Sch 11: 1 Jan 2017 (s 2(1) items 2, 4, 6, 9) Sch 10 (items 2–27, 49–54): 1 July 2018 (s 2(1) item 5)

s 815-40 — No double taxation

(1) The amount of a * transfer pricing benefit that is negated under this Subdivision for an entity is not to be taken into account again under another provision of this Act to increase the entity’s assessable income, reduce the entity’s deductions or reduce a * net capital loss of the entity. (2) Subsection (1) has effect despite former section 136AB of the Income Tax Assessment Act 1936 . (3) Nothing in this Subdivision limits Division 820 (about thin capitalisation) in its application to further reduce * debt deductions of an entity.

Amendment history: Inserted by No 115 of 2012, effective Sch 1 (items 5–11): 8 Sept 2012(s 2) | Amended by No 101 of 2013, effective Sch 2 (items 2, 20–43, 50): 29 June 2013 (s 2(1) item 3) Sch 2 (items 55–57): 8 Sept 2012 (s 2(1) item 4)

s 815-101 — What this Subdivision is about

This Subdivision applies if an entity would otherwise get a tax advantage in Australia from cross ‑ border conditions that are inconsistent with the internationally accepted arm’s length principle. The entity is treated for income tax and withholding tax purposes as if arm’s length conditions had operated. Table of sections Operative provisions 815 ‑ 105 Object 815 ‑ 110 Operation of Subdivision 815 ‑ 115 Substitution of arm’s length conditions 815 ‑ 120 When an entity gets a transfer pricing benefit 815 ‑ 125 Meaning of arm’s length conditions 815 ‑ 130 Relevance of actual commercial or financial relations 815 ‑ 135 Guidance 815 ‑ 140 Modification for thin capitalisation 815 ‑ 145 Consequential adjustments 815 ‑ 150 Amendment of assessments

Amendment history: Inserted by No 101 of 2013, effective Sch 2 (items 2, 20–43, 50): 29 June 2013 (s 2(1) item 3) Sch 2 (items 55–57): 8 Sept 2012 (s 2(1) item 4)

s 815-105 — Object

(1) The object of this Subdivision is to ensure that the amount brought to tax in Australia from cross ‑ border conditions between entities is not less than it would be if those conditions reflected: (a) the arm’s length contribution made by Australian operations through functions performed, assets used and risks assumed; and (b) the conditions that might be expected to operate between entities dealing at * arm’s length. (2) The Subdivision does this by specifying that, where an entity would otherwise get a tax advantage from actual conditions that differ from * arm’s length conditions, the arm’s length conditions are taken to operate for income tax and withholding tax purposes.

Amendment history: Inserted by No 101 of 2013, effective Sch 2 (items 2, 20–43, 50): 29 June 2013 (s 2(1) item 3) Sch 2 (items 55–57): 8 Sept 2012 (s 2(1) item 4)

s 815-110 — Operation of Subdivision

(1) Nothing in the provisions of this Act other than this Subdivision limits the operation of this Subdivision. (2) Nothing in this Subdivision limits Division 820 (about thin capitalisation) in its application to reduce, or further reduce, * debt deductions of an entity.

Amendment history: Inserted by No 101 of 2013, effective Sch 2 (items 2, 20–43, 50): 29 June 2013 (s 2(1) item 3) Sch 2 (items 55–57): 8 Sept 2012 (s 2(1) item 4)

s 815-115 — Substitution of arm’s length conditions

(1) For the purposes covered by subsection (2), if an entity gets a * transfer pricing benefit from conditions that operate between the entity and another entity in connection with their commercial or financial relations: (a) those conditions are taken not to operate; and (b) instead, the * arm’s length conditions are taken to operate. Note 1: The conditions that operate include, but are not limited to, such things as price, gross margin, net profit, and the division of profit between the entities. Note 2: There are special rules about documentation that affect when an entity has a reasonably arguable position about the application (or non ‑ application) of this Subdivision: see Subdivision 284 ‑ E in Schedule 1 to the Taxation Administration Act 1953 . (2) The purposes covered by this subsection are: (a) if the * transfer pricing benefit arises under subparagraph 815 ‑ 120(1)(c)(i)—working out the amount (if any) of the entity’s taxable income for the income year; and (b) if the transfer pricing benefit arises under subparagraph 815 ‑ 120(1)(c)(ii)—working out the amount (if any) of the entity’s loss of a particular * sort for the income year; and (c) if the transfer pricing benefit arises under subparagraph 815 ‑ 120(1)(c)(iii)—working out the amount (if any) of the entity’s * tax offsets for the income year; and (d) if the transfer pricing benefit arises under subparagraph 815 ‑ 120(1)(c)(iv)—working out the amount (if any) of * withholding tax payable by the entity in respect of interest or royalties.

Amendment history: Inserted by No 101 of 2013, effective Sch 2 (items 2, 20–43, 50): 29 June 2013 (s 2(1) item 3) Sch 2 (items 55–57): 8 Sept 2012 (s 2(1) item 4)

s 815-120 — When an entity gets a transfer pricing benefit

(1) An entity gets a transfer pricing benefit from conditions that operate between the entity and another entity in connection with their commercial or financial relations if: (a) those conditions (the actual conditions ) differ from the * arm’s length conditions; and (b) the actual conditions satisfy the cross ‑ border test in subsection (3) for the entity; and (c) had the arm’s length conditions operated, instead of the actual conditions, one or more of the following would, apart from this Subdivision, apply: (i) the amount of the entity’s taxable income for an income year would be greater ; (ii) the amount of the entity’s loss of a particular * sort for an income year would be less ; (iii) the amount of the entity’s * tax offsets for an income year would be less ; (iv) an amount of * withholding tax payable in respect of interest or royalties by the entity would be greater . Absence of condition (2) For the purposes of subsection (1), there is taken to be a difference between the actual conditions and the * arm’s length conditions if: (a) an actual condition exists that is not one of the arm’s length conditions; or (b) a condition does not exist in the actual conditions but is one of the arm’s length conditions. Cross ‑ border test (3) Conditions that operate between an entity and another entity in connection with their commercial or financial relations satisfy the cross ‑ border test if: (a) the conditions meet the overseas requirement in the following table for either or both of the entities; or (b) the conditions operate in connection with a * business that the entity carries on in an * area covered by an international tax sharing treaty. Overseas requirement Item Column 1 The conditions meet the overseas requirement for this type of entity: Column 2 if: 1 any of the following: (a) an Australian resident; (b) a resident trust estate for the purposes of Division 6 of Part III of the Income Tax Assessment Act 1936 ; (c) a partnership in which all of the partners are, directly or indirectly through one or more interposed partnerships, Australian residents or resident trust estates the conditions operate at or through an * overseas permanent establishment of the entity. 2 an entity not covered by column 1 of item 1 the conditions do not operate solely at or through an * Australian permanent establishment of the entity. (4) For the purposes of the table in subsection (3), treat any entity that is an Australian resident as not being an Australian resident if: (a) the entity is also a resident in a country that has entered into an * international tax agreement with Australia containing a * residence article; and (b) under that residence article, the entity is taken, for the purposes of the agreement, to be a resident only of that other country. Nil amounts (5) For the purposes of this section and section 815 ‑ 145: (a) treat an entity that has no taxable income for an income year as having a taxable income for the year of a nil amount; and (b) treat an entity that has no loss of a particular * sort for an income year as having a loss of that sort for the year of a nil amount; and (c) treat an entity that has no * tax offsets for an income year as having tax offsets for the year of a nil amount. Meaning of residence article (6) A residence article is: (a) Article 4 of the United Kingdom convention (within the meaning of the International Tax Agreements Act 1953 ); or (b) a corresponding provision of another * international tax agreement.

Amendment history: Inserted by No 101 of 2013, effective Sch 2 (items 2, 20–43, 50): 29 June 2013 (s 2(1) item 3) Sch 2 (items 55–57): 8 Sept 2012 (s 2(1) item 4)

s 815-125 — Meaning of arm’s length conditions

(1) The arm’s length conditions , in relation to conditions that operate between an entity and another entity, are the conditions that might be expected to operate between independent entities dealing wholly independently with one another in comparable circumstances. Most appropriate and reliable method to be used (2) In identifying the * arm’s length conditions, use the method, or the combination of methods, that is the most appropriate and reliable, having regard to all relevant factors, including the following: (a) the respective strengths and weaknesses of the possible methods in their application to the actual conditions; (b) the circumstances, including the functions performed, assets used and risks borne by the entities; (c) the availability of reliable information required to apply a particular method; (d) the degree of comparability between the actual circumstances and the comparable circumstances, including the reliability of any adjustments to eliminate the effect of material differences between those circumstances. Note: The possible methods include the methods set out in the documents mentioned in section 815 ‑ 135 (about relevant guidance material). Comparability of circumstances (3) In identifying comparable circumstances for the purpose of this section, regard must be had to all relevant factors, including the following: (a) the functions performed, assets used and risks borne by the entities; (b) the characteristics of any property or services transferred; (c) the terms of any relevant contracts between the entities; (d) the economic circumstances; (e) the business strategies of the entities. (4) For the purposes of this section, circumstances are comparable to actual circumstances if, to the extent (if any) that the circumstances differ from the actual circumstances: (a) the difference does not materially affect a condition that is relevant to the method; or (b) a reasonably accurate adjustment can be made to eliminate the effect of the difference on a condition that is relevant to the method.

Amendment history: Inserted by No 101 of 2013, effective Sch 2 (items 2, 20–43, 50): 29 June 2013 (s 2(1) item 3) Sch 2 (items 55–57): 8 Sept 2012 (s 2(1) item 4)

s 815-130 — Relevance of actual commercial or financial relations

Basic rule (1) The identification of the * arm’s length conditions must: (a) be based on the commercial or financial relations in connection with which the actual conditions operate; and (b) have regard to both the form and substance of those relations. Exceptions (2) Despite paragraph (1)(b), disregard the form of the actual commercial or financial relations to the extent (if any) that it is inconsistent with the substance of those relations. (3) Despite subsection (1), if: (a) independent entities dealing wholly independently with one another in comparable circumstances would not have entered into the actual commercial or financial relations; and (b) independent entities dealing wholly independently with one another in comparable circumstances would have entered into other commercial or financial relations; and (c) those other commercial or financial relations differ in substance from the actual commercial or financial relations; the identification of the * arm’s length conditions must be based on those other commercial or financial relations. (4) Despite subsection (1), if independent entities dealing wholly independently with one another in comparable circumstances would not have entered into commercial or financial relations, the identification of the * arm’s length conditions is to be based on that absence of commercial or financial relations. (5) Subsections 815 ‑ 125(3) and (4) (about comparability of circumstances) apply for the purposes of this section.

Amendment history: Inserted by No 101 of 2013, effective Sch 2 (items 2, 20–43, 50): 29 June 2013 (s 2(1) item 3) Sch 2 (items 55–57): 8 Sept 2012 (s 2(1) item 4)

s 815-135 — Guidance

(1) For the purpose of determining the effect this Subdivision has in relation to an entity, identify * arm’s length conditions so as best to achieve consistency with the documents covered by this section. (2) The documents covered by this section are as follows: (a) the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, as approved by the Council of the Organisation for Economic Cooperation and Development and last amended on 20 January 2022; (b) a document, or part of a document, prescribed by the regulations for the purposes of this paragraph. (3) However, the document mentioned in paragraph (2)(a) is not covered by this section if the regulations so prescribe. (4) Regulations made for the purposes of paragraph (2)(b) or subsection (3) may prescribe different documents or parts of documents for different circumstances.

Amendment history: Inserted by No 101 of 2013, effective Sch 2 (items 2, 20–43, 50): 29 June 2013 (s 2(1) item 3) Sch 2 (items 55–57): 8 Sept 2012 (s 2(1) item 4) | Amended by No 27 of 2017, effective Sch 1 (items 14–43, 52) and Sch 3: 1 July 2017 (s 2(1) items 4, 5) | Amended by No 64 of 2020, effective Sch 3 (items 72–122): 1 July 2020 (s 2(1) item 5) Sch 3 (items 228–239, 325, 326): 1 Oct 2020 (s 2(1) item 6) Sch 3 (items 327–330): 1 July 2017 (s 2(1) item 7) | Amended by No 67 of 2024, effective sch 1 (items 4 ‑ 7), sch 3 (items 1 ‑ 7), sch 5 (items 49 ‑ 52), sch 6: 1 Oct 2024 (s 2(1) items 3, 7, 10, 12)

s 815-140 — Modification for thin capitalisation

(1) This section modifies the way an entity to which section 815 ‑ 115 applies works out its taxable income, or its loss of a particular * sort, for an income year, if: (a) Division 820 (about thin capitalisation) applies to the entity for the income year; and (aa) the entity: (i) is not a * general class investor in relation to the income year; and (ii) has not made a choice under subsection 820 ‑ 85(2C) or 820 ‑ 185(2C) in relation to the income year; and (b) the * arm’s length conditions affect costs that are * debt deductions of the entity for the income year. (2) If working out what those costs would be if the * arm’s length conditions had operated involves applying a rate to a * debt interest: (a) work out the rate as if the arm’s length conditions had operated; but (b) apply the rate to the debt interest the entity actually issued. Note: Division 820 may apply to reduce or further reduce debt deductions.

Amendment history: Inserted by No 101 of 2013, effective Sch 2 (items 2, 20–43, 50): 29 June 2013 (s 2(1) item 3) Sch 2 (items 55–57): 8 Sept 2012 (s 2(1) item 4) | Amended by No 23 of 2024, effective sch 2 (items 3 ‑ 142, 144 ‑ 146): 1 July 2024 (s 2(1) item 3)

s 815-145 — Consequential adjustments

(1) The Commissioner may make a determination under subsection (2) in relation to an entity (the disadvantaged entity ) if: (a) * arm’s length conditions are taken by section 815 ‑ 115 to operate; and (b) the Commissioner considers that, if the arm’s length conditions, instead of the actual conditions, had operated: (i) the amount of the disadvantaged entity’s taxable income for an income year might have been expected to be less than its actual amount; or (ii) the amount of the disadvantaged entity’s loss of a particular * sort for an income year might have been expected to be greater than its actual amount; or (iii) the amount of the disadvantaged entity’s * tax offsets for an income year might have been expected to be greater than their actual amount; or (iv) an amount of * withholding tax payable in respect of interest or royalties by the disadvantaged entity might have been expected to be less than its actual amount; and (c) the Commissioner considers that it is fair and reasonable that the actual amount mentioned in subparagraph (b)(i), (ii), (iii) or (iv) (as the case requires) be adjusted accordingly. (2) For the purpose of adjusting an amount as mentioned in paragraph (1)(c), the Commissioner may make a determination stating the amount that is (and has been at all times) the amount of the disadvantaged entity’s: (a) taxable income for the income year; or (b) loss of a particular * sort for the income year; or (c) * tax offsets, or tax offset of a particular kind, for the income year; or (d) * withholding tax payable in respect of interest or royalties. (3) The Commissioner may take such action as the Commissioner considers necessary to give effect to a determination under this section. (4) The Commissioner must give a copy of a determination under this section to the disadvantaged entity. (5) A failure to comply with subsection (4) does not affect the validity of the determination. (7) An entity may give the Commissioner a written request to make a determination under this section relating to the entity. The Commissioner must decide whether or not to grant the request, and give the entity notice of the Commissioner’s decision. (8) If the entity is dissatisfied with the Commissioner’s decision, the entity may object, in the manner set out in Part IVC of the Taxation Administration Act 1953 , against that decision.

Amendment history: Inserted by No 101 of 2013, effective Sch 2 (items 2, 20–43, 50): 29 June 2013 (s 2(1) item 3) Sch 2 (items 55–57): 8 Sept 2012 (s 2(1) item 4) | Amended by No 81 of 2016, effective Sch 1 (items 2–6, 26–32, 36), Sch 2 (items 1–8, 13–18, 20), Sch 3 (items 1–5, 9), Sch 5–8, Sch 9 (items 1–3, 5), Sch 10 (items 72–80, 93) and Sch 11: 1 Jan 2017 (s 2(1) items 2, 4, 6, 9) Sch 10 (items 2–27, 49–54): 1 July 2018 (s 2(1) item 5)

s 815-150 — Amendment of assessments

(1) Section 170 of the Income Tax Assessment Act 1936 does not prevent the amendment of an assessment of an entity for an income year if: (a) the amendment is made within 7 years after the day on which the Commissioner gives notice of the assessment to the entity; and (b) the amendment is made for the purpose of giving effect to section 815 ‑ 115. (2) Section 170 of the Income Tax Assessment Act 1936 does not prevent the amendment of an assessment at any time for the purpose of giving effect to section 815 ‑ 145.

Amendment history: Inserted by No 101 of 2013, effective Sch 2 (items 2, 20–43, 50): 29 June 2013 (s 2(1) item 3) Sch 2 (items 55–57): 8 Sept 2012 (s 2(1) item 4)

s 815-201 — What this Subdivision is about

This Subdivision applies the internationally accepted arm’s length principle in the context of permanent establishments (PEs). Table of sections Operative provisions 815 ‑ 205 Object 815 ‑ 210 Operation of Subdivision 815 ‑ 215 Substitution of arm’s length profits 815 ‑ 220 When an entity gets a transfer pricing benefit 815 ‑ 225 Meaning of arm’s length profits 815 ‑ 230 Source rules for certain arm’s length profits 815 ‑ 235 Guidance 815 ‑ 240 Amendment of assessments

Amendment history: Inserted by No 101 of 2013, effective Sch 2 (items 2, 20–43, 50): 29 June 2013 (s 2(1) item 3) Sch 2 (items 55–57): 8 Sept 2012 (s 2(1) item 4)

s 815-205 — Object

The object of this Subdivision is to ensure that the amount brought to tax in Australia by entities operating * permanent establishments is not less than it would be if the permanent establishment were a distinct and separate entity engaged in the same or comparable activities under the same or comparable circumstances, but dealing wholly independently with the other part of the entity.

Amendment history: Inserted by No 101 of 2013, effective Sch 2 (items 2, 20–43, 50): 29 June 2013 (s 2(1) item 3) Sch 2 (items 55–57): 8 Sept 2012 (s 2(1) item 4)

s 815-210 — Operation of Subdivision

(1) Nothing in the provisions of this Act other than this Subdivision limits the operation of this Subdivision. (2) Nothing in this Subdivision limits Division 820 (about thin capitalisation) in its application to reduce, or further reduce, * debt deductions of an entity. (3) For the purposes of this Subdivision, a branch to which subsection 160ZZW(2) of the Income Tax Assessment Act 1936 (about certain Australian branches of foreign banks) applies is taken not to be, and not to have been at any time since its establishment, a * permanent establishment in Australia of the bank.

Amendment history: Inserted by No 101 of 2013, effective Sch 2 (items 2, 20–43, 50): 29 June 2013 (s 2(1) item 3) Sch 2 (items 55–57): 8 Sept 2012 (s 2(1) item 4)

s 815-215 — Substitution of arm’s length profits

(1) For the purposes covered by subsection (2), if an entity gets a * transfer pricing benefit from the attribution of profits to a * PE of the entity: (a) the amount of profits actually attributed to the PE is taken not to have been so attributed; and (b) instead, the * arm’s length profits are taken to have been attributed to the PE. Note: There are special rules about documentation that affect when an entity has a reasonably arguable position about the application (or non ‑ application) of this Subdivision: see Subdivision 284 ‑ E in Schedule 1 to the Taxation Administration Act 1953 . (2) The purposes covered by this subsection are: (a) if the * transfer pricing benefit arises under subparagraph 815 ‑ 220(1)(b)(i)—working out the amount (if any) of the entity’s taxable income for the income year; and (b) if the transfer pricing benefit arises under subparagraph 815 ‑ 220(1)(b)(ii)—working out the amount (if any) of a loss of a particular * sort for the income year; and (c) if the transfer pricing benefit arises under subparagraph 815 ‑ 220(1)(b)(iii)—working out the amount (if any) of the entity’s * tax offsets for the income year.

Amendment history: Inserted by No 101 of 2013, effective Sch 2 (items 2, 20–43, 50): 29 June 2013 (s 2(1) item 3) Sch 2 (items 55–57): 8 Sept 2012 (s 2(1) item 4)

s 815-220 — When an entity gets a transfer pricing benefit

(1) An entity gets a transfer pricing benefit from the attribution of profits to a * PE of the entity if: (a) the amount of profits (the actual profits ) attributed to the PE differs from the * arm’s length profits for the PE; and (b) had the arm’s length profits, instead of the actual profits, been attributed to the PE, one or more of the following would, apart from this Subdivision, apply: (i) the amount of the entity’s taxable income for an income year would be greater ; (ii) the amount of the entity’s loss of a particular * sort for an income year would be less ; (iii) the amount of the entity’s * tax offsets for an income year would be less . Nil amounts (2) For the purposes of this section: (a) treat an entity that has no taxable income for an income year as having a taxable income for the year of a nil amount; and (b) treat an entity that has no loss of a particular * sort for an income year as having a loss of that sort for the year of a nil amount; and (c) treat an entity that has no * tax offsets for an income year as having tax offsets for the year of a nil amount.

Amendment history: Inserted by No 101 of 2013, effective Sch 2 (items 2, 20–43, 50): 29 June 2013 (s 2(1) item 3) Sch 2 (items 55–57): 8 Sept 2012 (s 2(1) item 4)

s 815-225 — Meaning of arm’s length profits

(1) The arm’s length profits for a * PE of an entity are worked out by allocating the actual expenditure and income of the entity between the PE and the entity so that the profits attributed to the PE equal the profits the PE might be expected to make if: (a) the PE were a distinct and separate entity; and (b) the activities and circumstances of the PE, including the functions performed, assets used and risks borne by the PE, were those of that separate entity; and (c) the conditions that operated between that separate entity and the entity of which it is a PE were the * arm’s length conditions. (2) The conditions to which the * arm’s length conditions mentioned in paragraph (1)(c) relate are the conditions that would operate between the separate entity and the entity of which it is a * PE if the assumptions in paragraphs (1)(a) and (b) were made. (3) For the purposes of subsection (1): (a) the actual expenditure of an entity is taken to include losses and outgoings; and (b) the actual income of an entity is taken to include any amount that is, or is to be, included in the entity’s assessable income.

Amendment history: Inserted by No 101 of 2013, effective Sch 2 (items 2, 20–43, 50): 29 June 2013 (s 2(1) item 3) Sch 2 (items 55–57): 8 Sept 2012 (s 2(1) item 4)

s 815-230 — Source rules for certain arm’s length profits

(1) The * arm’s length profits for a * PE in Australia are taken, for the purposes of this Act, to be attributable to sources in Australia. (2) The * arm’s length profits for a * PE in an * area covered by an international tax sharing treaty are taken, for the purposes of this Act, to be attributable to sources in that area.

Amendment history: Inserted by No 101 of 2013, effective Sch 2 (items 2, 20–43, 50): 29 June 2013 (s 2(1) item 3) Sch 2 (items 55–57): 8 Sept 2012 (s 2(1) item 4)

s 815-235 — Guidance

(1) For the purpose of determining the effect this Subdivision has in relation to an entity, work out * arm’s length profits, and identify * arm’s length conditions, so as best to achieve consistency with: (a) the documents covered by this section; and (b) subject to paragraph (a), the documents covered by section 815 ‑ 135. (2) The documents covered by this section are as follows: (a) the Model Tax Convention on Income and on Capital, and its Commentaries, as adopted by the Council of the Organisation for Economic Cooperation and Development and last amended on 22 July 2010, to the extent that document extracts the text of Article 7 and its Commentary as they read before 22 July 2010; (b) a document, or part of a document, prescribed by the regulations for the purposes of this paragraph. (3) However, the document mentioned in paragraph (2)(a) is not covered by this section if the regulations so prescribe. (4) A document covered by section 815 ‑ 135 is to be disregarded for the purposes of this section if the regulations so prescribe. (5) Regulations made for the purposes of paragraph (2)(b), subsection (3) or subsection (4) may prescribe different documents or parts of documents for different circumstances.

Amendment history: Inserted by No 101 of 2013, effective Sch 2 (items 2, 20–43, 50): 29 June 2013 (s 2(1) item 3) Sch 2 (items 55–57): 8 Sept 2012 (s 2(1) item 4)

s 815-240 — Amendment of assessments

Section 170 of the Income Tax Assessment Act 1936 does not prevent the amendment of an assessment of an entity for an income year if: (a) the amendment is made within 7 years after the day on which the Commissioner gives notice of the assessment to the entity; and (b) the amendment is made for the purpose of giving effect to section 815 ‑ 215.

Amendment history: Inserted by No 101 of 2013, effective Sch 2 (items 2, 20–43, 50): 29 June 2013 (s 2(1) item 3) Sch 2 (items 55–57): 8 Sept 2012 (s 2(1) item 4)

s 815-301 — What this Subdivision is about

This Subdivision provides special rules about the way Subdivisions 815 ‑ B and 815 ‑ C apply to trusts and partnerships. Table of sections Operative provisions 815 ‑ 305 Special rule for trusts 815 ‑ 310 Special rules for partnerships

Amendment history: Inserted by No 101 of 2013, effective Sch 2 (items 2, 20–43, 50): 29 June 2013 (s 2(1) item 3) Sch 2 (items 55–57): 8 Sept 2012 (s 2(1) item 4)

s 815-305 — Special rule for trusts

Subdivisions 815 ‑ B and 815 ‑ C apply in relation to the * net income of a trust in the same way those Subdivisions apply in relation to the taxable income of an entity other than a trust.

Amendment history: Inserted by No 101 of 2013, effective Sch 2 (items 2, 20–43, 50): 29 June 2013 (s 2(1) item 3) Sch 2 (items 55–57): 8 Sept 2012 (s 2(1) item 4)

s 815-310 — Special rules for partnerships

(1) Subdivisions 815 ‑ B and 815 ‑ C apply in relation to the * net income of a partnership in the same way those Subdivisions apply in relation to the taxable income of an entity other than a partnership. (2) Subdivisions 815 ‑ B and 815 ‑ C apply in relation to a * partnership loss of a partnership in the same way those Subdivisions apply in relation to a * tax loss of an entity other than a partnership.

Amendment history: Inserted by No 101 of 2013, effective Sch 2 (items 2, 20–43, 50): 29 June 2013 (s 2(1) item 3) Sch 2 (items 55–57): 8 Sept 2012 (s 2(1) item 4)

s 815-350 — What this Subdivision is about

CBC reporting entities must give the Commissioner statements under this Subdivision. Note: This Subdivision enables the implementation of measures issued by the Organisation for Economic Cooperation and Development relating to transfer pricing documentation and country ‑ by ‑ country reporting (including Action 13 of the Action Plan on Base Erosion and Profit Shifting of the G20 and the Organisation for Economic Cooperation and Development) Table of sections Operative provisions 815 ‑ 355 Requirement to give statements 815 ‑ 360 Replacement reporting periods 815 ‑ 365 Exemptions 815 ‑ 370 Meaning of country by country reporting entity (or CBC reporting entity ) 815 ‑ 375 Meaning of country by country reporting parent (or CBC reporting parent ) 815 ‑ 380 Meaning of country by country reporting group (or CBC reporting group )

Amendment history: Inserted by No 170 of 2015, effective Sch 1 (items 1–4) and Sch 4: 11 Dec 2015 (s 2(1) item 1) | Amended by No 49 of 2020, effective Sch 1 (items 1–17, 21) and Sch 2 (items 1, 7): 1 July 2020 (s 2(1) item 1)

s 815-355 — Requirement to give statements

(1) You must give to the Commissioner a statement of each of the kinds referred to in subsection (3), in the * approved form, in relation to an income year if: (a) you were a * CBC reporting entity for a period that includes the whole or a part of the income year that preceded that income year; and (b) you are, during that income year, any of the following: (i) an Australian resident; (ii) a resident trust estate for the purposes of Division 6 of Part III of the Income Tax Assessment Act 1936 ; (iii) a partnership that has at least one partner who is an Australian resident; (iv) a foreign resident who operates an Australian permanent establishment (within the meaning of Part IVA of the Income Tax Assessment Act 1936 ); (v) a non ‑ resident trust estate (within the meaning of section 102AAB of the Income Tax Assessment Act 1936 ) that operates an Australian permanent establishment (within the meaning of Part IVA of that Act); (vi) a partnership that operates an Australian permanent establishment (within the meaning of that Part); and (c) you are not exempted under section 815 ‑ 365 from giving the statement; and (d) you are not included in a class of entities prescribed by the regulations. Note: Under section 815 ‑ 360, the Commissioner may allow you to give statements in relation to a 12 month period other than an income year. (2) You must give the statement within 12 months after the end of the period to which it relates. Note: Section 388 ‑ 55 in Schedule 1 to the Taxation Administration Act 1953 allows the Commissioner to defer the time for giving the statement. (3) The statements are to be of the following kinds: (a) a statement relating to the global operations and activities, and the pricing policies relevant to transfer pricing, of: (i) you; and (ii) if you are a * member of a * CBC reporting group during the income year—the other members of that group; (b) a statement relating to your operations, activities, dealings and transactions; (c) a statement relating to the allocation between countries of the income and activities of, and taxes paid by: (i) you; and (ii) if subparagraph (a)(ii) applies—the other members of that group. Note: These statements correspond to the following in Annexes I, II and III to Chapter V set out in the Guidance on Transfer Pricing Documentation and Country ‑ by ‑ country Reporting of the Organisation for Economic Cooperation and Development and the G20: (a) a statement under paragraph (a) corresponds to the master file (see Annexe I); (b) a statement under paragraph (b) corresponds to the local file (see Annexe II); (c) a statement under paragraph (c) corresponds to the country ‑ by ‑ country report (see Annexe III).

Amendment history: Inserted by No 170 of 2015, effective Sch 1 (items 1–4) and Sch 4: 11 Dec 2015 (s 2(1) item 1) | Amended by No 49 of 2020, effective Sch 1 (items 1–17, 21) and Sch 2 (items 1, 7): 1 July 2020 (s 2(1) item 1) | Amended by No 127 of 2021, effective Sch 1 and Sch 3 (items 42, 49–63, 65–69, 71, 72): 1 Jan 2022 (s 2(1) items 2, 5) Sch 2 (item 56) and Sch 3 (items 3–5, 33–35): 8 Dec 2021 (s 2(1) items 3, 4)

s 815-360 — Replacement reporting periods

(1) The Commissioner may, by notice in writing, allow you to give all statements, or specified kinds of statements, under section 815 ‑ 355 in relation to a 12 month period other than an income year. (2) A notice under subsection (1) is not a legislative instrument.

Amendment history: Inserted by No 170 of 2015, effective Sch 1 (items 1–4) and Sch 4: 11 Dec 2015 (s 2(1) item 1)

s 815-365 — Exemptions

Exemptions for particular entities (1) The Commissioner may, by notice in writing, exempt an entity from: (a) giving statements under section 815 ‑ 355; or (b) giving statements of a particular kind under that section. (2) A notice under subsection (1) is not a legislative instrument. General exemptions (3) The Commissioner may, by legislative instrument, determine that section 815 ‑ 355 does not apply to a specified class of entity.

Amendment history: Inserted by No 170 of 2015, effective Sch 1 (items 1–4) and Sch 4: 11 Dec 2015 (s 2(1) item 1)

s 815-370 — Meaning of country by country reporting entity (or CBC reporting entity )

An entity is a country by country reporting entity (or CBC reporting entity ) for a period if: (a) the entity is a * CBC reporting parent for the period; or (b) the entity is a * member of a * CBC reporting group during the period and another member of that group is a CBC reporting parent for the period.

Amendment history: Inserted by No 49 of 2020, effective Sch 1 (items 1–17, 21) and Sch 2 (items 1, 7): 1 July 2020 (s 2(1) item 1)

s 815-375 — Meaning of country by country reporting parent (or CBC reporting parent )

(1) An entity is a country by country reporting parent (or CBC reporting parent ) for a period if: (a) the entity is not an individual; and (b) if the entity is a * member of a * CBC reporting group at the end of the period—it is an entity that, according to: (i) * accounting principles; or (ii) if accounting principles do not apply in relation to the entity—commercially accepted principles related to accounting; is not controlled by any other member of the CBC reporting group at the end of the period; and (c) the entity’s * annual global income for the period is $1 billion or more. (2) For the purposes of paragraph (1)(c), in working out the entity’s * annual global income for the period, treat the reference in paragraph 960 ‑ 565(1)(aa) to * notional listed company group as instead being a reference to * CBC reporting group.

Amendment history: Inserted by No 49 of 2020, effective Sch 1 (items 1–17, 21) and Sch 2 (items 1, 7): 1 July 2020 (s 2(1) item 1)

s 815-380 — Meaning of country by country reporting group (or CBC reporting group )

(1) A group of entities is a country by country reporting group (or CBC reporting group ) if: (a) none of the entities is an individual; and (b) any of the following requirements are satisfied: (i) the group is consolidated for accounting purposes as a single group; (ii) the group is a * notional listed company group. (2) Each entity in the group is a member of the * CBC reporting group. (3) Subsection (5) applies if: (a) all the members of a group that is consolidated for accounting purposes as a single group (the smaller group ) are members of: (i) another such group; or (ii) a * notional listed company group; and (b) at least one entity is a member of the group mentioned in subparagraph (a)(i) or (ii) but is not a member of the smaller group. (4) Subsection (5) also applies if: (a) all the * members of a notional listed company group (the smaller group ) are members of: (i) another such group; or (ii) a group that is consolidated for accounting purposes as a single group; and (b) at least one entity is a member of the group mentioned in subparagraph (a)(i) or (ii) but is not a member of the smaller group. (5) For the purposes of subsection (1), treat the smaller group as not being any of the following: (a) a group that is consolidated for accounting purposes as a single group; (b) a * notional listed company group. (6) For the purposes of this section, assume that paragraph 960 ‑ 575(4)(a) were disregarded: (a) in determining whether a * notional listed company group exists; and (b) in identifying the * members of a notional listed company group. Note: The effect of that assumption is that certain exceptions in accounting or other principles to requirements to consolidate for accounting purposes are taken into account in working out the membership of the country by country reporting group. Where such exceptions apply, a country by country reporting group may have fewer members than the equivalent notional listed company group.

Amendment history: Inserted by No 49 of 2020, effective Sch 1 (items 1–17, 21) and Sch 2 (items 1, 7): 1 July 2020 (s 2(1) item 1)

s 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 where the entity is “thinly capitalised”. Table of sections 820 ‑ 10 Map of Division

Amendment history: Inserted by No 162 of 2001, effective Sch 1 (items 1, 14–16) and Sch 2: 1 July 2001 (s 2(1)) Sch 1 (items 17, 19): 15 July 2001 (s 2(2)(b)) Sch 1 (item 18): 1 July 2002 (s 2(3)(b)) | Amended by No 23 of 2024, effective sch 2 (items 3 ‑ 142, 144 ‑ 146): 1 July 2024 (s 2(1) item 3)

s 820-10 — Map of Division

The following table sets out a map of this Division. Map of Division Item This Subdivision: sets out: 1A Subdivision 820 ‑ AA (a) how all or a part of the debt deductions claimed by an entity covered by the Subdivision may be disallowed under one of three tests (the fixed ratio test, the group ratio test or the third party debt test); and (b) how the entity can choose to apply which one of these tests applies; and (c) where the fixed ratio test applies, whether the entity can claim a special deduction in respect of amounts previously disallowed under the fixed ratio test. 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. 2A Subdivision 820 ‑ EAA how all or a part of the debt deductions claimed by an entity covered by Subdivision 820 ‑ AA, 820 ‑ B or 820 ‑ C may be disallowed in relation to: (a) debt deductions in relation to the acquisition of CGT assets, or legal or equitable obligations, from associate pairs of the acquirer; or (b) debt deductions in relation to a financial arrangement that is entered into by an entity to fund etc. certain payments or distributions to one or more associate pairs of the entity. 2B Subdivision 820 ‑ EAB (a) concepts concerning third party debt; and (b) concepts that are relevant to entities that choose to apply the third party debt test. 3A Subdivision 820 ‑ FA how this Division applies to a consolidated group or MEC group. 3B Subdivision 820 ‑ FB special rules for grouping foreign bank branches with a consolidated group, MEC group or single Australian resident company. 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). 5A Subdivision 820 ‑ HA the meaning of controlled foreign entity debt and controlled foreign entity equity for the purposes of this Division. 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. 7A Subdivision 820 ‑ JA worldwide debt and equity concepts. 8 Subdivision 820 ‑ K the meaning of zero ‑ capital amount for the purposes of this Division. 8A Subdivision 820 ‑ KA the meaning of cost ‑ free debt capital, and excluded equity interest, for the purposes of this Division. 9 Subdivision 820 ‑ L special record keeping requirements for the purposes of this Division.

Amendment history: Inserted by No 162 of 2001, effective Sch 1 (items 1, 14–16) and Sch 2: 1 July 2001 (s 2(1)) Sch 1 (items 17, 19): 15 July 2001 (s 2(2)(b)) Sch 1 (item 18): 1 July 2002 (s 2(3)(b)) | Amended by No 53 of 2002, effective Schedules 3 and 4: 1 July 2002 Remainder: Royal Assent | Amended by No 117 of 2002, effective s 4: 2 Dec 2002 (s 2(1) item 1) Sch 1, 2, Sch 3 (items 1–7), Sch 4, Sch 5 (items 1–12), Sch 6–8, Sch 11 (items 8–11), Sch 12 (items 1–23), Sch 13 (items 1–14) and Sch 14 (items 8–13): 24 Oct 2002 (s 2(1) items 2, 3, 5, 6, 9) Sch 17: 29 June 2002 (s 2(1) item 11) | Amended by No 142 of 2003, effective s 4, Sch 1 (items 1–15, 18–40), Sch 2 (items 1, 2, 4–29, 33–49, 52, 53), Sch 3, Sch 7 (items 1–23) and Sch 8 (items 4–17, 17A, 17B, 18–21, 24(2), (3)): 17 Dec 2003 (s 2(1) items 1–5, 10, 11, 13) | Amended by No 101 of 2006, effective Schedules 3 and 4: 1 Jan 2008 Remainder: Royal Assent | Amended by No 110 of 2014, effective Sch 1 and Sch 2 (items 2–5, 13–23): 17 Oct 2014 (s 2(1) item 2) Sch 3, Sch 4 (items 1, 3) and Sch 5 (items 16–67, 74–76, 84–91, 98–121): 16 Oct 2014 (s 2(1) items 3–5, 7) | Amended by No 23 of 2024, effective sch 2 (items 3 ‑ 142, 144 ‑ 146): 1 July 2024 (s 2(1) item 3)

s 820-31 — Order of application of Subdivisions

(1) First, work out if a * debt deduction of an entity for an income year is disallowed under Subdivision 820 ‑ EAA (debt deduction limitation rules for debt deduction creation). (2) To the extent that all or part of a debt deduction is disallowed under that Subdivision, disregard the debt deduction in applying the following provisions in relation to the entity for the income year: (a) Subdivision 820 ‑ AA; (b) Subdivision 820 ‑ B; (c) Subdivision 820 ‑ C. Note: The provisions mentioned in paragraphs (2)(a) to (c) may further disallow debt deductions of the entity.

Amendment history: Inserted by No 23 of 2024, effective sch 2 (items 3 ‑ 142, 144 ‑ 146): 1 July 2024 (s 2(1) item 3)

s 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 deductions, in financing their Australian operations: (a) * Australian entities that operate internationally; (b) Australian entities that are foreign controlled; (c) * foreign entities that operate in Australia. Note: This Division applies in relation to debt deductions of an entity as reduced, if required, in accordance with Division 815 (about cross ‑ border transfer pricing).

Amendment history: Inserted by No 162 of 2001, effective Sch 1 (items 1, 14–16) and Sch 2: 1 July 2001 (s 2(1)) Sch 1 (items 17, 19): 15 July 2001 (s 2(2)(b)) Sch 1 (item 18): 1 July 2002 (s 2(3)(b)) | Amended by No 115 of 2012, effective Sch 1 (items 5–11): 8 Sept 2012(s 2) | Amended by No 101 of 2013, effective Sch 2 (items 2, 20–43, 50): 29 June 2013 (s 2(1) item 3) Sch 2 (items 55–57): 8 Sept 2012 (s 2(1) item 4) | Amended by No 23 of 2024, effective sch 2 (items 3 ‑ 142, 144 ‑ 146): 1 July 2024 (s 2(1) item 3)

s 820-32 — Exemption for private or domestic assets and non ‑ debt liabilities

(1) This Division does not apply to: (a) an asset that is used (or held for use) wholly or principally for private or domestic purposes; or (b) a * non ‑ debt liability that is wholly or principally of a private or domestic nature. (2) Subsection (1) does not apply in relation to the following: (a) Subdivision 820 ‑ EAA; (b) any other provision in this Division, to the extent that it relates to that Subdivision.

Amendment history: Inserted by No 53 of 2002, effective Schedules 3 and 4: 1 July 2002 Remainder: Royal Assent | Amended by No 23 of 2024, effective sch 2 (items 3 ‑ 142, 144 ‑ 146): 1 July 2024 (s 2(1) item 3)

s 820-35 — Application—$2 million threshold

Subdivision 820 ‑ AA, 820 ‑ B, 820 ‑ C, 820 ‑ D, 820 ‑ E or 820 ‑ EAA 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 $2 million or less.

Amendment history: Inserted by No 162 of 2001, effective Sch 1 (items 1, 14–16) and Sch 2: 1 July 2001 (s 2(1)) Sch 1 (items 17, 19): 15 July 2001 (s 2(2)(b)) Sch 1 (item 18): 1 July 2002 (s 2(3)(b)) | Repealed and substituted by No 110 of 2014, effective Sch 1 and Sch 2 (items 2–5, 13–23): 17 Oct 2014 (s 2(1) item 2) Sch 3, Sch 4 (items 1, 3) and Sch 5 (items 16–67, 74–76, 84–91, 98–121): 16 Oct 2014 (s 2(1) items 3–5, 7) | Amended by No 23 of 2024, effective sch 2 (items 3 ‑ 142, 144 ‑ 146): 1 July 2024 (s 2(1) item 3)

s 820-37 — Application—assets threshold

(1) Subdivision 820 ‑ AA, 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) either: (i) the entity is an * outward investing financial entity (non ‑ ADI) or an * outward investing entity (ADI) for a period that is all or any part of that year (and is not a * general class investor for that year); or (ii) assuming that the entity were a * financial entity for all of that year, it would be, for all of that year, an outward investing financial entity (non ‑ ADI) and not an inward investing financial entity (non ‑ ADI); and (b) the entity is not also an * inward investing financial entity (non ‑ ADI) or an * inward investing entity (ADI) for all or any part of that year; and (c) the result of applying the following formula is equal to or greater than 0.9: where: average Australian assets : (a) of an * Australian entity—is the average value, for that year, of all the assets of the entity, other than: (i) any assets attributable to the entity’s * overseas permanent establishments; or (ii) any * debt interests held by the entity, to the extent to which any value of the interests is all or a part of the * controlled foreign entity debt of the entity; or (iii) any * equity interests or debt interests held by the entity, to the extent to which any value of the interests is all or a part of the * controlled foreign entity equity of the entity; or (iv) any debt interests that are * issued by * associates of the entity, that are * on issue, and that are held by the entity; or (v) any equity interests that the entity holds in associates of the entity; and (b) of a * foreign entity—is the average value, for that year, of all the assets of the entity that are: (i) located in Australia; or (ii) attributable to the entity’s * Australian permanent establishments; or (iii) debt interests held by the entity, to the extent to which the interests are covered by subsection (2); or (iv) equity interests held by the entity, to the extent to which the interests are covered by subsection (3); other than: (v) any debt interests that are issued by associates of the entity, that are on issue, and that are held by the entity; or (vi) any equity interests that the entity holds in associates of the entity. average total assets of an entity is the average value, for that year, of all the assets of the entity, other than: (a) any * debt interests that are * issued by * associates of the entity, that are * on issue, and that are held by the entity; or (b) any * equity interests that the entity holds in associates of the entity. Foreign entity—debt interest issued by an Australian entity (2) If a * foreign entity holds a * debt interest that: (a) was * issued by an * Australian entity; and (b) is * on issue; this subsection covers the interest to the extent to which the interest is not attributable to any * overseas permanent establishments of the Australian entity. Foreign entity—equity interest in an Australian entity (3) If a * foreign entity holds an * equity interest in an * Australian entity, this subsection covers the interest to the extent to which the interest is not attributable to any * overseas permanent establishments of the Australian entity.

Amendment history: Inserted by No 162 of 2001, effective Sch 1 (items 1, 14–16) and Sch 2: 1 July 2001 (s 2(1)) Sch 1 (items 17, 19): 15 July 2001 (s 2(2)(b)) Sch 1 (item 18): 1 July 2002 (s 2(3)(b)) | Amended by No 53 of 2002, effective Schedules 3 and 4: 1 July 2002 Remainder: Royal Assent | Amended by No 143 of 2007, effective Schedule 1 (items 1, 4, 128–194, 222, 223, 225, 226), Schedule 2, Schedule 5 (items 1–16, 48(1)–(3)), Schedule 6 and Schedule 7 (items 18–68): Royal Assent Schedule 5 (items 31–46): 15 Mar 2007 (s 2(1) item 6) | Amended by No 23 of 2024, effective sch 2 (items 3 ‑ 142, 144 ‑ 146): 1 July 2024 (s 2(1) item 3)

s 820-39 — Exemption of certain special purpose entities

(1) Subdivision 820 ‑ AA, 820 ‑ B, 820 ‑ C, 820 ‑ D, 820 ‑ E or 820 ‑ EAA does not apply to disallow any * debt deduction of an entity for an income year if the entity meets the conditions in subsection (3) throughout the income year. (2) Subdivision 820 ‑ AA, 820 ‑ B, 820 ‑ C, 820 ‑ D, 820 ‑ E or 820 ‑ EAA does not apply to disallow any * debt deduction of an entity for an income year that is an amount incurred by the entity during a part of that year, if the entity meets the conditions in subsection (3) throughout that part. (3) The conditions are: (a) the entity is one established for the purposes of managing some or all of the economic risk associated with assets, liabilities or investments (whether the entity assumes the risk from another entity or creates the risk itself); and (b) the total value of * debt interests in the entity is at least 50% of the total value of the entity’s assets; and (c) the entity is an insolvency ‑ remote special purpose entity according to criteria of an internationally recognised rating agency that are applicable to the entity’s circumstances. (4) The condition in paragraph (3)(c) can be met without the rating agency determining that the entity meets those criteria. Note 1: While an entity meets the conditions in subsection (3), it is treated for the purposes of this Division as not being a member of a consolidated group or MEC group (see section 820 ‑ 584). Note 2: An entity that does not qualify for the exemption in this section may still be a securitisation vehicle under subsection 820 ‑ 942(2), in which case the value of its securitised assets will count towards its zero ‑ capital amount under Subdivision 820 ‑ K. Multi ‑ tier special purpose entities (5) An entity is taken to meet the conditions in subsection (3) throughout a period that is all or part of an income year, if the entity is one of 2 or more entities that together satisfy the condition that, assuming: (a) each of the entities had been a division or part of the same entity (the notional entity ), rather than a separate entity, throughout that period; and (b) the notional entity had consisted only of those divisions and parts throughout that period; the notional entity would meet the conditions in subsection (3) throughout that period.

Amendment history: Inserted by No 142 of 2003, effective s 4, Sch 1 (items 1–15, 18–40), Sch 2 (items 1, 2, 4–29, 33–49, 52, 53), Sch 3, Sch 7 (items 1–23) and Sch 8 (items 4–17, 17A, 17B, 18–21, 24(2), (3)): 17 Dec 2003 (s 2(1) items 1–5, 10, 11, 13) | Amended by No 101 of 2006, effective Schedules 3 and 4: 1 Jan 2008 Remainder: Royal Assent | Amended by No 23 of 2024, effective sch 2 (items 3 ‑ 142, 144 ‑ 146): 1 July 2024 (s 2(1) item 3)

s 820-40 — Meaning of debt deduction

(1) Debt deduction , of an entity and for an income year, is a cost incurred 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 economically equivalent to interest; or (ii) the difference between the * financial benefits received, or to be received, by the entity under a * scheme giving rise to a * 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 a scheme giving rise to a 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; (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 a * 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): (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.

Amendment history: Inserted by No 162 of 2001, effective Sch 1 (items 1, 14–16) and Sch 2: 1 July 2001 (s 2(1)) Sch 1 (items 17, 19): 15 July 2001 (s 2(2)(b)) Sch 1 (item 18): 1 July 2002 (s 2(3)(b)) | Amended by No 142 of 2003, effective s 4, Sch 1 (items 1–15, 18–40), Sch 2 (items 1, 2, 4–29, 33–49, 52, 53), Sch 3, Sch 7 (items 1–23) and Sch 8 (items 4–17, 17A, 17B, 18–21, 24(2), (3)): 17 Dec 2003 (s 2(1) items 1–5, 10, 11, 13) | Amended by No 101 of 2006, effective Schedules 3 and 4: 1 Jan 2008 Remainder: Royal Assent | Amended by No 23 of 2024, effective sch 2 (items 3 ‑ 142, 144 ‑ 146): 1 July 2024 (s 2(1) item 3)

s 820-45 — What this Subdivision is about

This Subdivision sets out the thin capitalisation rules that apply to general class investors (that is, entities that are not dealt with in rules set out in Subdivisions 820 ‑ B, 820 ‑ C, 820 ‑ D or 820 ‑ E). These rules deal with the following matters: • how all or a part of the debt deductions claimed by the entity may be disallowed under one of three tests (the fixed ratio test, the group ratio test or the third party debt test); • how the entity can choose to apply which one of these tests applies; • where the fixed ratio test applies, whether the entity can claim a special deduction in respect of amounts previously disallowed under the fixed ratio test. Table of sections Operative provisions 820 ‑ 46 Thin capitalisation rule for general class investors 820 ‑ 47 Choices under subsection 820 ‑ 46(3) or (4) 820 ‑ 48 Where entity is taken to make third party debt test choice 820 ‑ 49 Meaning of obligor group etc. 820 ‑ 50 Amount of debt deduction disallowed 820 ‑ 51 Meaning of fixed ratio earnings limit and group ratio earnings limit 820 ‑ 52 Meaning of tax EBITDA 820 ‑ 53 Meaning of group ratio , GR group , GR group parent and GR group member 820 ‑ 54 Meaning of GR group net third party interest expense , financial statement net third party interest expense and adjusted net third party interest expense 820 ‑ 55 Meaning of entity EBITDA and GR group EBITDA 820 ‑ 56 Special deduction for previously FRT disallowed amounts—fixed ratio test 820 ‑ 57 Meaning of FRT disallowed amount 820 ‑ 58 FRT disallowed amount is treated as zero where subsequent choice means fixed ratio test does not apply 820 ‑ 59 When FRT disallowed amount is treated as zero for companies and trusts 820 ‑ 60 Excess tax EBITDA amount

Amendment history: Inserted by No 23 of 2024, effective sch 2 (items 3 ‑ 142, 144 ‑ 146): 1 July 2024 (s 2(1) item 3)

s 820-46 — Thin capitalisation rule for general class investors

Thin capitalisation rule (1) This subsection disallows all or part of an entity’s * debt deductions for an income year if, for that year: (a) the entity is a * general class investor (see subsection (2)); and (b) the entity: (i) has not made a choice under subsection (3) or (4) (fixed ratio test applies); or (ii) has made a choice under subsection (3) (group ratio test applies); or (iii) has made a choice under subsection (4) (third party debt test applies). 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 ‑ 50. Note 3: A consolidated group or MEC group may be a general class investor to which this Subdivision applies: see Subdivisions 820 ‑ FA and 820 ‑ FB. General class investor (2) The entity is a general class investor for an income year if, and only if: (a) for a period that is all or part of the income year, the entity is not any of the following: (i) an * outward investing financial entity (non ‑ ADI); (ii) an * inward investing financial entity (non ‑ ADI); (iii) an * outward investing entity (ADI); (iv) an * inward investing entity (ADI); and (b) assuming that the entity were a * financial entity for all of the income year, it would be, for the income year, any of the following: (i) an outward investing financial entity (non ‑ ADI); (ii) an inward investing financial entity (non ‑ ADI). (3) An entity that is a * general class investor for an income year may make a choice under this subsection to apply the group ratio test in relation to that income year if: (a) the entity is a * GR group member for the period corresponding to the income year of a * GR group for the period; and (b) the * GR group EBITDA for the period of the GR group is greater than zero. (4) An entity that is a * general class investor for an income year may make a choice under this subsection to apply the third party debt test in relation to that income year. (5) An entity that is a * general class investor for an income year is taken to have made a choice under subsection (4) in relation to that income year if section 820 ‑ 48 applies to the entity in relation to that income year. (6) Subsection (5) applies despite subsection 820 ‑ 47(1).

Amendment history: Inserted by No 23 of 2024, effective sch 2 (items 3 ‑ 142, 144 ‑ 146): 1 July 2024 (s 2(1) item 3)

s 820-47 — Choices under subsection 820 ‑ 46(3) or (4)

(1) A choice under subsection 820 ‑ 46(3) or (4) can only be made in the * approved form. (2) A choice under subsection 820 ‑ 46(3) or (4) can only be made: (a) on or before the earlier of the following days: (i) the day the entity lodges its * income tax return for the income year; (ii) the day the entity is required to lodge its income tax return for the income year; or (b) a later day allowed by the Commissioner. (3) Subject to subsections (4) and (4A) of this section, a choice under subsection 820 ‑ 46(3) or (4) cannot be revoked. (4) An entity that makes a choice under subsection 820 ‑ 46(3) or (4) (other than a choice that is taken to have been made under subsection 820 ‑ 46(5)) may revoke the choice if the Commissioner makes a decision to that effect under subsection (6). (4A) If, under subsection 820 ‑ 46(5), an entity is taken to have made a choice to apply the third party debt test in relation to an income year: (a) the entity may not make a choice under subsection 820 ‑ 46(3) (group ratio test applies) in relation to that income year; and (b) any choice previously made under subsection 820 ‑ 46(3) by the entity in relation to that income year is revoked and taken never to have been made. (5) For the purposes of this Division (other than this section), if a choice is revoked under subsection (4) or (4A) of this section , the entity is taken to have never made the choice. (6) The Commissioner can decide, in writing, that a specified entity can revoke a specified choice under subsection 820 ‑ 46(3) or (4) (other than a choice that is taken to have been made under subsection 820 ‑ 46(5)) in relation to an income year, if the Commissioner is satisfied that all of the following conditions are satisfied: (a) the entity made the choice; (c) the entity has applied to the Commissioner, in the * approved form, to revoke the choice before the earlier of the following days: (i) the day that is 4 years after the day the entity lodged its * income tax return for the income year; (ii) the day that is 4 years after the day the entity was required to lodge its income tax return for the income year; (d) it is fair and reasonable, having regard to matters the Commissioner considers relevant, to allow the entity to revoke the choice. (7) If the Commissioner makes a decision under subsection (6), the Commissioner must give a copy of the decision to the entity as soon as practicable.

Amendment history: Inserted by No 23 of 2024, effective sch 2 (items 3 ‑ 142, 144 ‑ 146): 1 July 2024 (s 2(1) item 3)

s 820-48 — Where entity is taken to make third party debt test choice

(1) For the purposes of subsection 820 ‑ 46(5), this section applies to an entity (the first entity ) in relation to an income year if: (a) the first entity is a * member of an * obligor group in relation to a * debt interest; and (b) the entity that issued the debt interest: (i) has made a choice under subsection 820 ‑ 46(4) in relation to that income year (including a choice that is taken to be made under subsection 820 ‑ 46(5) in relation to a different obligor group); and (ii) is required to lodge an * income tax return for the income year; and (c) the first entity: (i) is an * associate entity of the entity mentioned in paragraph (b) of this subsection; and (ii) is required to lodge an * income tax return for the income year. (2) For the purposes of subparagraph (1)(c)(i), in determining whether an entity is an associate entity of another entity: (aa) disregard the requirement in subsections 820 ‑ 905(1) and (2A) that the entity is an * associate of the other entity, unless only paragraph 820 ‑ 905(1)(b) applies; and (a) treat the references in paragraphs 820 ‑ 905(1)(a) and 820 ‑ 905(2A)(a) to “an * associate interest of 50% or more” as instead being a reference to “a * TC control interest of 20% or more”; and (b) treat subsection 820 ‑ 860(3) as applying for the purposes of determining whether the entity is an associate entity of the other entity (as a result of paragraph (a) of this subsection); and (c) treat the purposes mentioned in subparagraphs 820 ‑ 870(1)(b)(i) and (ii) as including the purposes of determining whether the entity is an associate entity of the other entity (as a result of paragraph (a) of this subsection). (3) For the purposes of subsection 820 ‑ 46(5), this section also applies to the entity mentioned in that subsection in relation to an income year if: (a) the entity has entered into a * cross staple arrangement with one or more other entities; and (b) one or more of those other entities has made a choice under subsection 820 ‑ 46(4) in relation to that income year (including a choice that is taken to be made under subsection 820 ‑ 46(5)).

Amendment history: Inserted by No 23 of 2024, effective sch 2 (items 3 ‑ 142, 144 ‑ 146): 1 July 2024 (s 2(1) item 3)

s 820-49 — Meaning of obligor group etc.

(1) Subsection (2) applies if: (a) an entity (the borrower ) has issued a * debt interest to another entity (the creditor ); and (b) the creditor has recourse for payment of the debt to which the debt interest relates to assets of one or more other entities (each of which is an obligor entity ). (2) Each obligor entity and the borrower is a member of an obligor group in relation to the * debt interest. (3) For the purposes of paragraph (1)(b), disregard assets that are * membership interests in the borrower.

Amendment history: Inserted by No 23 of 2024, effective sch 2 (items 3 ‑ 142, 144 ‑ 146): 1 July 2024 (s 2(1) item 3)

s 820-50 — Amount of debt deduction disallowed

(1) The amount (the total disallowed amount ) disallowed under subsection 820 ‑ 46(1) of the * debt deductions of an entity for an income year is: (a) if the entity has not made a choice under subsection 820 ‑ 46(3) or (4) in relation to the income year (fixed ratio test applies)—the amount by which the entity’s * net debt deductions for the income year exceed the entity’s * fixed ratio earnings limit for the income year (see section 820 ‑ 51); or (b) if the entity has made a choice under subsection 820 ‑ 46(3) in relation to the income year (group ratio test applies)—the amount by which the entity’s net debt deductions for the income year exceed the entity’s * group ratio earnings limit for the income year (see section 820 ‑ 51); or (c) if the entity has made a choice under subsection 820 ‑ 46(4) in relation to the income year (third party debt test applies)—the amount by which the entity’s debt deductions for the income year exceed the entity’s * third party earnings limit for the income year (see section 820 ‑ 427A). Note 1: The disallowed amount also does not form part of the cost base of a CGT asset. See section 110 ‑ 54. Note 2: The entity’s net debt deductions for the income year can be a negative amount. (2) The amount by which a particular * debt deduction is disallowed as a result of subsection (1) is worked out as follows: (a) first, divide the total disallowed amount by the * debt deductions of the entity for the income year; (b) next, multiply the amount of the particular debt deduction by the result of paragraph (a). (3) An entity’s net debt deductions for an income year is worked out as follows: (a) first, work out the sum of the entity’s * debt deductions (disregarding this Division other than Subdivision 820 ‑ EAA) for the income year; (b) next, work out the sum of each amount included in the entity’s assessable income for that year that is: (i) interest, an amount in the nature of interest, or any other amount that is economically equivalent to interest; or (ii) any amount directly incurred by another entity in obtaining or maintaining the financial benefits received, or to be received, by the other entity under a * scheme giving rise to a * debt interest; or (iii) any other expense that is incurred by another entity and that is specified in the regulations made for the purposes of this subparagraph; (c) next, subtract the result of paragraph (b) from the result of paragraph (a). (4) To avoid doubt, an entity’s net debt deductions for an income year can be a negative amount.

Amendment history: Inserted by No 23 of 2024, effective sch 2 (items 3 ‑ 142, 144 ‑ 146): 1 July 2024 (s 2(1) item 3)

s 820-51 — Meaning of fixed ratio earnings limit and group ratio earnings limit

(1) An entity’s fixed ratio earnings limit for an income year is 30% of its * tax EBITDA for the income year. (2) An entity’s group ratio earnings limit for an income year is its * group ratio for the income year multiplied by its * tax EBITDA for the income year.

Amendment history: Inserted by No 23 of 2024, effective sch 2 (items 3 ‑ 142, 144 ‑ 146): 1 July 2024 (s 2(1) item 3)

s 820-52 — Meaning of tax EBITDA

(1) An entity’s tax EBITDA for an income year is worked out as follows: (a) first, work out the entity’s taxable income or * tax loss for the income year (disregarding the operation of this Division (other than Subdivision 820 ‑ EAA) and treating a tax loss as a negative amount); (b) next, add the entity’s * net debt deductions for the income year; (c) next, add the sum of the entity’s deductions (if any) from its assessable income for the income year that are any of the following: (i) * general deductions that relate to forestry establishment and preparation costs unless those costs relate to the clearing of native forests; (ii) deductions under Divisions 40 and 43 (other than deductions for the entire amount of an expense incurred by the entity); (iii) deductions under section 70 ‑ 120; (ca) next, if the entity is an entity to which subsection 820 ‑ 60(1) applies—add the * excess tax EBITDA amount (if any) worked out under that section for the income year; (d) next, make adjustments to the result of paragraph (c) or (ca), as the case requires, in accordance with regulations (if any) made for the purposes of this paragraph. If the result of paragraph (d) is less than zero, treat it as being zero. Note: The entity’s net debt deductions for the income year can be a negative amount. Tax losses from earlier income years (1A) In working out the taxable income or * tax loss of a * corporate tax entity for an income year for the purposes of subsection (1), assume that: (a) the entity chooses to deduct, under subsection 36 ‑ 17(2) or (3), all of the entity’s tax losses for * loss years occurring before the income year; and (b) subsection 36 ‑ 17(5) does not apply to that choice. Franked distributions (2) For the purposes of this section, disregard Division 207, to the extent that Division results in an amount of, or a * share of, a * franking credit being included in the entity’s assessable income for the income year. Dividends etc. (3) In working out the taxable income or * tax loss of an entity for the purposes of subsection (1), disregard any * dividend or * non ‑ share dividend paid to the entity by an * associate entity and included in the entity’s assessable income under section 44 of the Income Tax Assessment Act 1936 . Trusts other than AMITs (4) If the entity is a trust other than an * AMIT: (a) treat the reference in subsection (1) to the entity’s taxable income as being a reference to the * net income of the entity; and (b) treat the reference in subsection (1) to the entity’s * net debt deductions as being a reference to the entity’s net debt deductions taken into account in working out that net income; and (c) treat the reference in subsection (1) to the entity’s deductions as being a reference to the entity’s deductions taken into account in working out that net income; and (d) treat the references in subsection (1) to the entity’s assessable income as being a reference to the entity’s assessable income taken into account in working out that net income. (5) To avoid doubt, for the purposes of references in subsection (4) to net income, do not make the assumption in subsection 102UX(3) of the Income Tax Assessment Act 1936 . Beneficiaries of trusts other than AMITs (6) In working out the taxable income or * tax loss of an entity for the purposes of subsection (1), if the entity is a beneficiary of a trust other than an * AMIT, and is an * associate entity of the trust: (a) disregard the operation of the following provisions in relation to the trust: (i) Subdivision 115 ‑ C; (ii) Division 6 of Part III of the Income Tax Assessment Act 1936 ; and (b) disregard distributions from the trust to the entity. Attribution managed investment trusts (6A) If the entity is an * AMIT: (a) treat the reference in subsection (1) to the entity’s taxable income as being a reference to the * net income of the entity; and (b) treat the reference in subsection (1) to the entity’s * net debt deductions as being a reference to the entity’s net debt deductions taken into account in working out that net income; and (c) treat the reference in subsection (1) to the entity’s deductions as being a reference to the entity’s deductions taken into account in working out that net income; and (d) treat the references in subsection (1) to the entity’s assessable income as being a reference to the entity’s assessable income taken into account in working out that net income. Members of AMITs (6B) In working out the taxable income or * tax loss of an entity for the purposes of subsection (1), if the entity is a member of an * AMIT, and is an * associate entity of the AMIT: (a) disregard the operation of Division 276 in relation to the AMIT; and (b) disregard distributions from the AMIT to the entity. Partnerships (7) If the entity is a partnership: (a) treat the reference in subsection (1) to the entity’s taxable income as being a reference to the * net income of the entity; and (b) treat the reference in subsection (1) to the entity’s * net debt deductions as being a reference to the entity’s net debt deductions taken into account in working out that net income. (c) treat the reference in subsection (1) to the entity’s deductions as being a reference to the entity’s deductions taken into account in working out that net income; and (d) treat the references in subsection (1) to the entity’s assessable income as being a reference to the entity’s assessable income taken into account in working out that net income. Partners in partnerships (8) In working out the taxable income or * tax loss of an entity for the purposes of subsection (1), if the entity is a partner in a partnership, and is an * associate entity of the partnership, disregard the operation of Division 5 of Part III of the Income Tax Assessment Act 1936 . Associate entity test—TC control interest of 10% or more (9) For the purposes of subsections (3), (6), (6B) and (8), in determining whether an entity is an associate entity of another entity: (aa) disregard the requirement in subsections 820 ‑ 905(1) and (2A) that the entity is an * associate of the other entity, unless only paragraph 820 ‑ 905(1)(b) applies; and (a) treat the references in paragraphs 820 ‑ 905(1)(a) and 820 ‑ 905(2A)(a) to “an * associate interest of 50% or more” as instead being a reference to “a * TC control interest of 10% or more”; and (b) treat subsection 820 ‑ 860(3) as applying for the purposes of determining whether the entity is an associate entity of the other entity (as a result of paragraph (a) of this subsection); and (c) treat the purposes mentioned in subparagraphs 820 ‑ 870(1)(b)(i) and (ii) as including the purposes of determining whether the entity is an associate entity of the other entity (as a result of paragraph (a) of this subsection). Notional deductions of R&D entities (10) In working out the taxable income or * tax loss of an entity for the purposes of subsection (1), if the entity is an * R&D entity that is entitled to a notional deduction for an income year under Division 355 in relation to * R&D activities of the R&D entity, subtract an amount equivalent to the amount of the notional deduction.

Amendment history: Inserted by No 23 of 2024, effective sch 2 (items 3 ‑ 142, 144 ‑ 146): 1 July 2024 (s 2(1) item 3)

s 820-53 — Meaning of group ratio , GR group , GR group parent and GR group member

(1) If an entity is a * GR group member for a period of a * GR group for the period, the entity’s group ratio for the income year corresponding to the period is worked out as follows: (a) first, work out the * GR group net third party interest expense, for that period, of the GR group; (b) next, work out the * GR group EBITDA for that period of the GR group; (c) next, divide the result of paragraph (a) by the result of paragraph (b). If the result of paragraph (b) is zero, the entity’s group ratio for the income year is zero. Note: The entity must keep records in accordance with section 820 ‑ 985 if the entity works out a group ratio under this section. (2) A GR group , for a period, is: (a) if * audited consolidated financial statements for the period have been prepared for a worldwide parent entity (as described in subsection 820 ‑ 935(6))—the group comprised of all of the following: (i) the worldwide parent entity; (ii) each other entity that is fully consolidated on a line ‑ by ‑ line basis in those audited consolidated financial statements; or (b) if paragraph (a) does not apply, and * global financial statements have been prepared for the period for a * global parent entity—the group comprised of all of the following: (i) the global parent entity; (ii) each other entity that is fully consolidated on a line ‑ by ‑ line basis in those global financial statements. (3) If paragraph (2)(a) applies: (a) the GR group parent for the period of the * GR group is the worldwide parent entity mentioned in that paragraph; and (b) each of the entities mentioned in that paragraph is a GR group member for the period of the * GR group. (4) If paragraph (2)(b) applies: (a) the GR group parent for the period of the * GR group is the * global parent entity mentioned in that paragraph; and (b) each of the entities mentioned in that paragraph is a GR group member for the period of the * GR group.

Amendment history: Inserted by No 23 of 2024, effective sch 2 (items 3 ‑ 142, 144 ‑ 146): 1 July 2024 (s 2(1) item 3)

s 820-54 — Meaning of GR group net third party interest expense , financial statement net third party interest expense and adjusted net third party interest expense

(1) The GR group net third party interest expense , for a period, of a * GR group for the period, is the amount that would be the group’s * financial statement net third party interest expense for the period, if: (a) where paragraph 820 ‑ 53(2)(a) applies—the * audited consolidated financial statements for the period for the * GR group parent for the period of the group were prepared on the basis that the following were treated as interest: (i) an amount in the nature of interest; (ii) any other amount that is economically equivalent to interest; or (b) where paragraph 820 ‑ 53(2)(b) applies—the * global financial statements for the period for the GR group parent for the period of the group were prepared on the basis that the following were treated as interest: (i) an amount in the nature of interest; (ii) any other amount that is economically equivalent to interest. (2) The financial statement net third party interest expense , for a period, of a * GR group for the period, is: (a) the amount of the * GR group’s net third party interest expense for the period, as disclosed in the following statements: (i) if paragraph 820 ‑ 53(2)(a) applies—the * audited consolidated financial statements for the * GR group parent for the period for the GR group; (ii) if paragraph 820 ‑ 53(2)(b) applies—the * global financial statements for the GR group parent for the period for the GR group; reduced by the amount of each payment (if any) covered by subsection (3), to the extent that it was a factor in working out that net third party interest expense; or (b) if those statements do not disclose that net third party interest expense—the amount worked out as follows: (i) first, identify the amount of the group’s third party interest expenses for the period disclosed in those statements; (ii) next, reduce the result of subparagraph (i) by the amount of each payment (if any) covered by subsection (3), to the extent that it was a factor in working out those third party interest expenses; (iii) next, reduce the result of subparagraph (ii) by the amount of the group’s third party interest income for the period disclosed in those statements; (iv) next, increase the result of subparagraph (iii) by the amount of each payment (if any) covered by subsection (3), to the extent that it was a factor in working out that third party interest income. (3) For the purposes of subsection (2), this subsection covers a payment if: (a) the payment is made by an entity to an * associate entity of the entity; and (b) either: (i) the entity is a * GR group member for the period of the * GR group and the associate entity is not such a GR group member; or (ii) the entity is not a GR group member for the period of the GR group and the associate entity is such a GR group member. (4) The adjusted net third party interest expense , for a period, of an entity or a * GR group is: (a) for an entity—the amount that would be the entity’s net interest expense for the period if the following payments were disregarded: (i) a payment that is made by the entity to an * associate entity of the entity; (ii) a payment that is made by an associate entity of the entity to the entity; or (b) for a GR group—the amount that would be the GR group’s net interest expense for the period if the following payments were disregarded: (i) a payment that is made by a * GR group member of the GR group to an associate entity of any GR group member of the GR group; (ii) a payment that is made by an associate entity of a GR group member of the GR group to any GR group member of the GR group. (5) For the purposes of subsections (3) and (4), in determining whether an entity is an associate entity of another entity: (aa) disregard the requirement in subsections 820 ‑ 905(1) and (2A) that the entity is an * associate of the other entity, unless only paragraph 820 ‑ 905(1)(b) applies; and (a) treat the references in paragraphs 820 ‑ 905(1)(a) and 820 ‑ 905(2A)(a) to “an * associate interest of 50% or more” as instead being a reference to “a * TC control interest of 20% or more”; and (b) treat subsection 820 ‑ 860(3) as applying for the purposes of determining whether the entity is an associate entity of the other entity (as a result of paragraph (a) of this subsection); and (c) treat the purposes mentioned in subparagraphs 820 ‑ 870(1)(b)(i) and (ii) as including the purposes of determining whether the entity is an associate entity of the other entity (as a result of paragraph (a) of this subsection).

Amendment history: Inserted by No 23 of 2024, effective sch 2 (items 3 ‑ 142, 144 ‑ 146): 1 July 2024 (s 2(1) item 3)

s 820-55 — Meaning of entity EBITDA and GR group EBITDA

(1) The entity EBITDA of an entity, for a period, is the sum of the following for the entity for the period: (a) the entity’s net profit (disregarding tax expenses); (b) the entity’s * adjusted net third party interest expense; (c) the entity’s depreciation and amortisation expenses. (2) The GR group EBITDA , for a period, of a * GR group for the period, is the sum of the following: (a) the GR group’s net profit (disregarding tax expenses); (b) the GR group’s * adjusted net third party interest expense; (c) the GR group’s depreciation and amortisation expenses; as disclosed in: (d) if paragraph 820 ‑ 53(2)(a) applies—the * audited consolidated financial statements for the * GR group parent for the period for the GR group; or (e) if paragraph 820 ‑ 53(2)(b) applies—the * global financial statements for the GR group parent for the period for the GR group. (3) For the purposes of subsection (2), in working out the * GR group’s * GR group EBITDA for the period, if a * GR group member for the period of the GR group has an * entity EBITDA for the period of less than zero, disregard that entity EBITDA. (4) To avoid doubt, for the purposes of this section, an entity’s, or a * GR group’s, net profit (disregarding tax expenses) can be a negative amount.

Amendment history: Inserted by No 23 of 2024, effective sch 2 (items 3 ‑ 142, 144 ‑ 146): 1 July 2024 (s 2(1) item 3)

s 820-56 — Special deduction for previously FRT disallowed amounts—fixed ratio test

(1) An entity can deduct the amount worked out under subsection (2) from its assessable income for the income year if: (a) the entity has not made a choice under subsection 820 ‑ 46(3) or (4) in relation to the income year (fixed ratio test applies); and (b) the entity’s * fixed ratio earnings limit for the income year exceeds the sum of the entity’s * net debt deductions for the income year. Note: The entity’s net debt deductions for the income year can be a negative amount. (2) Work out the amount of the deduction as follows: (a) first, work out the amount of the excess mentioned in paragraph (1)(b); (b) next, apply against that excess each of the entity’s * FRT disallowed amounts for the previous 15 income years (to the extent that they have not already been applied under this paragraph in respect of any of those previous income years). The amount of the deduction is the total amount applied under paragraph (b). (3) For the purposes of paragraph (2)(b): (a) apply * FRT disallowed amounts in sequence, where a FRT disallowed amount for an earlier income year is applied before a FRT disallowed amount from a later income year; and (b) apply FRT disallowed amounts up to, but not beyond, the excess mentioned in paragraph (1)(b). Note: As a result of paragraph (3)(b), part of a FRT disallowed amount may be applied against the excess mentioned in paragraph (1)(b).

Amendment history: Inserted by No 23 of 2024, effective sch 2 (items 3 ‑ 142, 144 ‑ 146): 1 July 2024 (s 2(1) item 3)

s 820-57 — Meaning of FRT disallowed amount

An entity has a fixed ratio test disallowed amount (or FRT disallowed amount ) for an income year equal to: (a) if * debt deductions of the entity for the income year are disallowed under subsection 820 ‑ 46(1) and the amount disallowed is worked out in accordance with paragraph 820 ‑ 50(1)(a) (fixed ratio test applies)—the amount disallowed; or (b) otherwise—zero.

Amendment history: Inserted by No 23 of 2024, effective sch 2 (items 3 ‑ 142, 144 ‑ 146): 1 July 2024 (s 2(1) item 3)

s 820-58 — FRT disallowed amount is treated as zero where subsequent choice means fixed ratio test does not apply

(1) Subsection (2) applies if: (a) an entity has not made a choice under subsection 820 ‑ 46(3) or (4) in relation to an income year; and (b) the entity makes a choice under subsection 820 ‑ 46(3) or (4) in relation to a subsequent income year. (2) Despite section 820 ‑ 57, for the purpose of applying section 820 ‑ 56 in respect of that subsequent income year and later income years, treat the entity as having a * FRT disallowed amount of zero for every income year before that subsequent income year.

Amendment history: Inserted by No 23 of 2024, effective sch 2 (items 3 ‑ 142, 144 ‑ 146): 1 July 2024 (s 2(1) item 3)

s 820-59 — When FRT disallowed amount is treated as zero for companies and trusts

(1) This section applies if an entity is a company or a trust. (2) This section applies for the purposes of applying a * FRT disallowed amount of the entity for an income year (the disallowance year ) under paragraph 820 ‑ 56(2)(b), in order to work out the amount of a deduction from its assessable income for another income year (the deduction year ) under subsection 820 ‑ 56(1). (3) Despite section 820 ‑ 57, treat the * FRT disallowed amount for the disallowance year as being zero unless: (a) if the entity is a company—subsection (4) applies; or (b) if the entity is a trust—subsection (5) applies. Rules for companies (4) This subsection applies if, assuming that: (a) the * FRT disallowed amount were a * tax loss; and (b) the disallowance year were the * loss year; and (c) the following provisions were disregarded: (i) subsection 165 ‑ 115B(3); (ii) subsection 165 ‑ 115BA(5); (iii) section 415 ‑ 35; Divisions 165, 166 and 167 would not prevent the company from deducting the entire amount of that tax loss in the deduction year. Rules for trusts (5) This subsection applies if, assuming that: (a) the * FRT disallowed amount were a tax loss (within the meaning of Schedule 2F to the Income Tax Assessment Act 1936 ); and (b) the disallowance year were a loss year (within the meaning of that Schedule); that Schedule would not prevent the entity from deducting the entire amount of that tax loss in the deduction year.

Amendment history: Inserted by No 23 of 2024, effective sch 2 (items 3 ‑ 142, 144 ‑ 146): 1 July 2024 (s 2(1) item 3)

s 820-60 — Excess tax EBITDA amount

Scope (1) This section applies to an entity (the controlling entity ) if: (a) the controlling entity is, for a period that is all or part of an income year, one of the following entities: (i) a company that is an * Australian entity; (ii) a unit trust that is a * resident trust for CGT purposes; (iii) a * managed investment trust; (iv) a partnership that is an Australian entity; and (b) the controlling entity is a * general class investor for all or part of the income year; and (c) the controlling entity has not made a choice under subsection 820 ‑ 46(3) or (4) in relation to the income year; and (d) one or more other entities (each of which is a controlled entity ) satisfy the conditions in subsection (2) of this section in relation to the controlling entity for the income year. (2) An entity (the test entity ) satisfies the conditions in this subsection in relation to the controlling entity for an income year if: (a) the controlling entity has a * TC direct control interest of 50% or more in the test entity at any time during the income year; and (b) the test entity is, for a period that is all or part of the income year, one of the following entities: (i) a company that is an * Australian entity; (ii) a unit trust that is a * resident trust for CGT purposes; (iii) a * managed investment trust; (iv) a partnership that is an Australian entity; and (c) the test entity is a * general class investor for all or part of the income year; and (d) the test entity has not made a choice under subsection 820 ‑ 46(3) or (4) in relation to the income year. Excess tax EBITDA amount (3) The controlling entity’s excess tax EBITDA amount for the income year is the amount worked out using the following method statement. Method statement Step 1. For each controlled entity, work out the amount (if any) by which the * fixed ratio earnings limit of the controlled entity for the income year exceeds the sum of the following: (a) the controlled entity’s * net debt deductions for the income year (for the purposes of this paragraph, treat a negative amount of net debt deductions as nil); (b) the total of the controlled entity’s * FRT disallowed amounts for the 15 income years ending immediately before the income year (to the extent those amounts have not been applied under section 820 ‑ 56 ). Step 2. For each controlled entity: (a) work out the controlling entity’s * TC direct control interest for each day in the income year; and (b) for each day on which the amount was 50% or greater, add the amounts; and (c) divide the result of paragraph (b) by the number of days in the income year during which the controlled entity was in existence. Express the result as a percentage. Step 3. For each controlled entity, multiply the result of step 1 by the percentage worked out under step 2. If the amount worked out under step 1 for a controlled entity is nil, the result for that controlled entity under this step will be nil. Step 4. Add up the amounts worked out under step 3. Step 5. Divide the result of step 4 by 0.3. The result of this step is the excess tax EBITDA amount . Modification of TC direct control interest—companies (4) For the purposes of this section, in working out whether the controlling entity holds a * TC direct control interest in a company, apply subsection 820 ‑ 855(2) as if it instead included the modifications of Part X of the Income Tax Assessment Act 1936 set out in the following table. Modifications of provisions in Part X of the Income Tax Assessment Act 1936 Item Provisions Modifications 1 Section 350 (including any other provision in Part X of the Income Tax Assessment Act 1936 that defines a term used in the section) The section applies for the purposes of this section and Subdivision 820 ‑ H rather than only for the purposes of Part X of the Income Tax Assessment Act 1936 2 Subsection 350(1) The reference to “greater or greatest” is taken to be a reference to “lesser or least” 3 Subsection 350(2) The reference to “highest” is taken to be a reference to “lowest” 4 Subsections 350(6) and (7) The subsections do not apply Modification of TC direct control interest—trusts (5) For the purposes of this section, in working out whether the controlling entity holds a * TC direct control interest in a trust, apply subsection 820 ‑ 860(2) as if it also included the modifications of Part X of the Income Tax Assessment Act 1936 set out in the following table. Modifications of provisions in Part X of the Income Tax Assessment Act 1936 Item Provisions Modifications 3 Subsection 351(1) The reference to “greater of those percentages” reads “lesser of those percentages” 4 Subsections 351(2) to (4) The subsections do not apply Modification of TC direct control interest—partnerships (6) For the purposes of this section, in working out whether the controlling entity holds a * TC direct control interest in a partnership, apply section 820 ‑ 865 as if: (a) the reference to “greatest” were a reference to “least”; and (b) paragraph 820 ‑ 865(b) were omitted. Modified meaning of Australian entity (7) For the purposes of this section, in determining whether an entity is an * Australian entity (including for the purposes of determining whether another entity is a * foreign entity) at a particular time: (a) for the purposes of paragraph 336(a) of the Income Tax Assessment Act 1936 , treat a partnership as being an Australian entity if, at that time, a * direct participation interest of 50% or more is held in the partnership by one or more of the following: (i) an Australian resident; (ii) an * Australian trust; and (b) disregard section 337 of that Act.

Amendment history: Inserted by No 23 of 2024, effective sch 2 (items 3 ‑ 142, 144 ‑ 146): 1 July 2024 (s 2(1) item 3)

s 820-65 — What this Subdivision is about

This Subdivision sets out the thin capitalisation rules that apply to an entity that is an outward investing financial entity (non ‑ ADI) for all of an income year. 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 financial entities (non ‑ ADI) 820 ‑ 90 Maximum allowable debt 820 ‑ 100 Safe harbour debt amount—outward investing financial entity (non ‑ ADI) 820 ‑ 110 Worldwide gearing debt amount—outward investor that is not also an inward investment vehicle 820 ‑ 111 Worldwide gearing debt amount—outward investor that is also an inward investment vehicle 820 ‑ 115 Amount of debt deduction disallowed 820 ‑ 120 Application to part year periods

Amendment history: Inserted by No 162 of 2001, effective Sch 1 (items 1, 14–16) and Sch 2: 1 July 2001 (s 2(1)) Sch 1 (items 17, 19): 15 July 2001 (s 2(2)(b)) Sch 1 (item 18): 1 July 2002 (s 2(3)(b)) | Amended by No 23 of 2024, effective sch 2 (items 3 ‑ 142, 144 ‑ 146): 1 July 2024 (s 2(1) item 3)

s 820-85 — Thin capitalisation rule for outward investing financial entities (non ‑ ADI)

Thin capitalisation rule (1A) Subsection (1) applies if: (a) an entity is an * outward investing financial entity (non ‑ ADI) (see subsection (2)) for all of an income year; and (b) either: (i) the entity has made a choice under subsection (2C) in relation to the income year; or (ii) otherwise—the entity’s * adjusted average debt (see subsection (3)) for the income year exceeds its * maximum allowable debt (see section 820 ‑ 90) for the income year. Note: 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. (1) This subsection disallows: (a) if paragraph (1A)(b)(i) applies—all or part of the entity’s * debt deductions for the income year (to the extent that they are not attributable to an * overseas permanent establishment of the entity); or (b) if paragraph (1A)(b)(ii) applies—all or a part of each debt deduction of the entity for the income year (to the extent that it is not attributable to an overseas permanent establishment of the entity). Note 1: To work out the amount to be disallowed, see section 820 ‑ 115. Note 2: For the rules that apply to an entity that is an outward investing financial entity (non ‑ ADI) for only a part of an income year, see section 820 ‑ 120 in conjunction with subsection (2) of this section. Note 3: A consolidated group or MEC group may be an outward investing financial entity (non ‑ ADI) to which this Subdivision applies: see Subdivisions 820 ‑ FA and 820 ‑ FB. Outward investing financial entity (non ‑ ADI) (2) The entity is an outward investing financial entity (non ‑ ADI) for a period that is all or a part of an income year if, and only if, it is an * outward investor (financial) for that period (according to the items of the following table). Outward investing financial 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: (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) the relevant entity is a * financial entity throughout that period the relevant entity is an outward investing financial entity (non ‑ ADI) for that period 2 (a) the entity (the relevant entity ) is an * Australian entity throughout a period that is all or a part of an income year; and (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 financial entity (non ‑ ADI) or an * outward investing entity (ADI) for that period the relevant entity is a * financial entity throughout that period the relevant entity is an outward investing financial entity (non ‑ ADI) for that period Note: To determine whether an entity is an Australian controller of an Australian controlled foreign entity, see Subdivision 820 ‑ H. (2A) However, the entity is not an outward investing financial entity (non ‑ 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 ). (2BA) For the purposes of item 2 of the table in subsection (2) of this section, assume that the other * Australian entity is a * financial entity for all of the income year. (2C) An entity that is an * outward investing financial entity (non ‑ ADI) for a period that is all or part of an income year may make a choice under this subsection to apply the third party debt test in relation to that income year. (2D) Section 820 ‑ 47 applies in relation to a choice under subsection (2C) in the same way that it applies in relation to a choice under subsection 820 ‑ 46(3) or (4). 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. 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 the relevant year, of the entity’s * borrowed securities amount. Step 5. Add to the result of step 4 the average value, for the relevant year, of the * cost ‑ free debt capital of the entity. 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.

Amendment history: Inserted by No 162 of 2001, effective Sch 1 (items 1, 14–16) and Sch 2: 1 July 2001 (s 2(1)) Sch 1 (items 17, 19): 15 July 2001 (s 2(2)(b)) Sch 1 (item 18): 1 July 2002 (s 2(3)(b)) | Amended by No 53 of 2002, effective Schedules 3 and 4: 1 July 2002 Remainder: Royal Assent | Amended by No 142 of 2003, effective s 4, Sch 1 (items 1–15, 18–40), Sch 2 (items 1, 2, 4–29, 33–49, 52, 53), Sch 3, Sch 7 (items 1–23) and Sch 8 (items 4–17, 17A, 17B, 18–21, 24(2), (3)): 17 Dec 2003 (s 2(1) items 1–5, 10, 11, 13) | Amended by No 101 of 2006, effective Schedules 3 and 4: 1 Jan 2008 Remainder: Royal Assent | Amended by No 110 of 2014, effective Sch 1 and Sch 2 (items 2–5, 13–23): 17 Oct 2014 (s 2(1) item 2) Sch 3, Sch 4 (items 1, 3) and Sch 5 (items 16–67, 74–76, 84–91, 98–121): 16 Oct 2014 (s 2(1) items 3–5, 7) | Amended by No 23 of 2024, effective sch 2 (items 3 ‑ 142, 144 ‑ 146): 1 July 2024 (s 2(1) item 3) | Amended by No 136 of 2024, effective sch 5, sch 6 (items 12 ‑ 21): 1 Jan 2025 (s 2(1) items 10, 12)

s 820-90 — Maximum allowable debt

Entity is not also an 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 (financial) for all or any part of that year: (a) the * safe harbour debt amount; (c) unless the entity has * worldwide equity of nil or a negative amount—the * worldwide gearing debt amount. Entity is also an inward investment vehicle (financial) (2) The entity’s maximum allowable debt for an income year is the greatest of the following amounts if the entity is also an * inward investment vehicle (financial) for all or any part of that year: (a) the * safe harbour debt amount; (c) unless subsection (3) applies to the entity—the * worldwide gearing debt amount. Inward investment vehicles that are not eligible for the worldwide gearing debt amount (3) This subsection applies to an entity, if: (a) the entity has * statement worldwide equity, or * statement worldwide assets, of nil or a negative amount; or (b) * audited consolidated financial statements for the entity for the income year do not exist; or (c) the result of applying the following formula is greater than 0.5: where: average Australian assets of an entity is the average value, for the statement period mentioned in subsection (4), of all the assets of the entity, other than: (a) any assets attributable to the entity’s * overseas permanent establishments; or (b) any * debt interests held by the entity, to the extent to which any value of the interests is all or a part of the * controlled foreign entity debt of the entity; or (c) any * equity interests or debt interests held by the entity, to the extent to which any value of the interests is all or a part of the * controlled foreign entity equity of the entity. (4) For the purposes of the definition of average Australian assets in subsection (3) the statement period is the period for which the * audited consolidated financial statements for the entity for the income year have been prepared. (5) For the purposes of the formula in paragraph (3)(c), if: (a) an amount is included in * statement worldwide assets in respect of an asset; and (b) the asset was acquired, held or otherwise dealt with by an entity for a purpose (other than an incidental purpose) that included ensuring that subsection (3) does not apply to an entity; and (c) as a result of the acquisition, holding or dealing with of the asset, the amount included in statement worldwide assets exceeds the amount (including nil) that would otherwise be so included; apply the amount of the excess to reduce statement worldwide assets (or statement worldwide assets as reduced by a previous application of this subsection).

Amendment history: Inserted by No 162 of 2001, effective Sch 1 (items 1, 14–16) and Sch 2: 1 July 2001 (s 2(1)) Sch 1 (items 17, 19): 15 July 2001 (s 2(2)(b)) Sch 1 (item 18): 1 July 2002 (s 2(3)(b)) | Amended by No 142 of 2003, effective s 4, Sch 1 (items 1–15, 18–40), Sch 2 (items 1, 2, 4–29, 33–49, 52, 53), Sch 3, Sch 7 (items 1–23) and Sch 8 (items 4–17, 17A, 17B, 18–21, 24(2), (3)): 17 Dec 2003 (s 2(1) items 1–5, 10, 11, 13) | Amended by No 110 of 2014, effective Sch 1 and Sch 2 (items 2–5, 13–23): 17 Oct 2014 (s 2(1) item 2) Sch 3, Sch 4 (items 1, 3) and Sch 5 (items 16–67, 74–76, 84–91, 98–121): 16 Oct 2014 (s 2(1) items 3–5, 7) | Amended by No 23 of 2024, effective sch 2 (items 3 ‑ 142, 144 ‑ 146): 1 July 2024 (s 2(1) item 3)

s 820-100 — Safe harbour debt amount—outward investing financial entity (non ‑ ADI)

(1) If the entity is an * outward investing financial entity (non ‑ ADI) 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 1A. Reduce the result of step 1 by the average value, for that year, of all the * excluded equity interests in the entity. Step 2. Reduce the result of step 1A 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 * 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 15 / 16 . 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 excluded equity interests, 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, $5 million, $9 million, $6 million, $5 million and $4 million respectively. Deducting these amounts from the result of step 1 (through applying steps 1A to 7) leaves $121 million. Multiplying $121 million by 15 / 16 results in $113.4375 million. Adding the average zero ‑ capital amount of $4 million results in $117.4375 million. As the company does not have any associate entity excess amount, the total debt amount is therefore $117.4375 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 1A. Reduce the result of step 1 by the average value, for that year, of all the * excluded equity interests in the entity. Step 2. Reduce the result of step 1A 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 * 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 / 5 . 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. 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 excluded equity interests, associate entity equity, controlled foreign entity debt, controlled foreign entity equity, non ‑ debt liabilities and on ‑ lent amount are $5 million, $5 million, $9 million, $6 million, $5 million and $35 million respectively. Deducting these amounts from the result of step 1 (through applying steps 1A to 6) leaves $95 million. Multiplying $95 million by 3 / 5 results in $57 million. Adding the average on ‑ lent amount of $35 million results in $92 million. Reducing the result of step 8 by the associate entity debt amount of $5 million equals $87 million. As the company does not have any associate entity excess amount, the adjusted on ‑ lent amount is therefore $87 million.

Amendment history: Inserted by No 162 of 2001, effective Sch 1 (items 1, 14–16) and Sch 2: 1 July 2001 (s 2(1)) Sch 1 (items 17, 19): 15 July 2001 (s 2(2)(b)) Sch 1 (item 18): 1 July 2002 (s 2(3)(b)) | Amended by No 53 of 2002, effective Schedules 3 and 4: 1 July 2002 Remainder: Royal Assent | Amended by No 142 of 2003, effective s 4, Sch 1 (items 1–15, 18–40), Sch 2 (items 1, 2, 4–29, 33–49, 52, 53), Sch 3, Sch 7 (items 1–23) and Sch 8 (items 4–17, 17A, 17B, 18–21, 24(2), (3)): 17 Dec 2003 (s 2(1) items 1–5, 10, 11, 13) | Amended by No 110 of 2014, effective Sch 1 and Sch 2 (items 2–5, 13–23): 17 Oct 2014 (s 2(1) item 2) Sch 3, Sch 4 (items 1, 3) and Sch 5 (items 16–67, 74–76, 84–91, 98–121): 16 Oct 2014 (s 2(1) items 3–5, 7) | Amended by No 23 of 2024, effective sch 2 (items 3 ‑ 142, 144 ‑ 146): 1 July 2024 (s 2(1) item 3)

s 820-110 — Worldwide gearing debt amount—outward investor that is not also an inward investment vehicle

Outward investing financial entity (non ‑ ADI) that is not also an inward investment vehicle (financial) If the entity is an * outward investing financial entity (non ‑ ADI) for that year, and not also an * inward investment vehicle (financial) for all or any part of 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 3. Add 1 to the result of step 1. Step 4. Divide the result of step 1 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 step 1 is therefore 3. Dividing 3 by 4 (through applying steps 3 and 4) and multiplying the result by $121 million (which is the result of step 7 of the method statement in subsection 820 ‑ 100(2)) equals $90.75 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 $90.75 million results in $94.75 million. As the company does not have any associate entity excess amount, the worldwide gearing debt amount is therefore $94.75 million.

Amendment history: Inserted by No 162 of 2001, effective Sch 1 (items 1, 14–16) and Sch 2: 1 July 2001 (s 2(1)) Sch 1 (items 17, 19): 15 July 2001 (s 2(2)(b)) Sch 1 (item 18): 1 July 2002 (s 2(3)(b)) | Amended by No 110 of 2014, effective Sch 1 and Sch 2 (items 2–5, 13–23): 17 Oct 2014 (s 2(1) item 2) Sch 3, Sch 4 (items 1, 3) and Sch 5 (items 16–67, 74–76, 84–91, 98–121): 16 Oct 2014 (s 2(1) items 3–5, 7) | Amended by No 23 of 2024, effective sch 2 (items 3 ‑ 142, 144 ‑ 146): 1 July 2024 (s 2(1) item 3)

s 820-111 — Worldwide gearing debt amount—outward investor that is also an inward investment vehicle

Outward investing financial entity (non ‑ ADI) If the entity is an * outward investing financial entity (non ‑ ADI) for the income year, and is also an * inward investment vehicle (financial) for all or any part of that year, the worldwide gearing debt amount is the result of applying the method statement in this subsection. Method statement Step 1. Divide the entity’s * statement worldwide debt for the income year by the entity’s * statement worldwide equity for that year. Step 2. Add 1 to the result of step 1. Step 3. Divide the result of step 1 by the result of step 2. Step 4. Multiply the result of step 3 in this method statement by the result of step 7 in the method statement in subsection 820 ‑ 100(2). Step 5. Add to the result of step 4 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 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: TRR Limited, a company that is an Australian entity, has a worldwide parent entity in the United States of America. TRR Limited also has permanent establishments in Malaysia. TRR Limited has statement worldwide debt of $90 million and statement worldwide equity of $30 million. The result of applying step 1 is therefore 3. Dividing 3 by 4 (through applying steps 2 and 3) and multiplying the result by $100 million (which is the result of step 7 of the method statement in subsection 820 ‑ 100(2)) equals $75 million. The zero capital amount is $5 million. Adding that amount to $75 million results in $80 million. As the company does not have any associate entity excess amount, the worldwide gearing debt amount is therefore $80 million.

Amendment history: Inserted by No 110 of 2014, effective Sch 1 and Sch 2 (items 2–5, 13–23): 17 Oct 2014 (s 2(1) item 2) Sch 3, Sch 4 (items 1, 3) and Sch 5 (items 16–67, 74–76, 84–91, 98–121): 16 Oct 2014 (s 2(1) items 3–5, 7) | Amended by No 23 of 2024, effective sch 2 (items 3 ‑ 142, 144 ‑ 146): 1 July 2024 (s 2(1) item 3)

s 820-115 — Amount of debt deduction disallowed

(1) If subparagraph 820 ‑ 85(1A)(b)(i) applies, the amount (the total disallowed amount ) disallowed under subsection 820 ‑ 85(1) of the * debt deductions of an entity for an income year is the amount by which those debt deductions (to the extent that they are not attributable to an * overseas permanent establishment of the entity) exceed the entity’s * third party earnings limit for the income year (see section 820 ‑ 427A). Note: The disallowed amount also does not form part of the cost base of a CGT asset. See section 110 ‑ 54. (2) The amount by which a particular * debt deduction is disallowed as a result of subsection (1) is worked out as follows: (a) first, divide the total disallowed amount by the * debt deductions of the entity for the income year; (b) next, multiply the amount of the particular debt deduction by the result of paragraph (a). (3) If subparagraph 820 ‑ 85(1A)(b)(ii) applies, the amount of a * debt deduction of an entity for an income year disallowed under subsection 820 ‑ 85(1) is worked out using the following formula: where: average debt means the sum of: (a) the average value, for the income year, of the entity’s * debt capital that is covered by step 1 of the method statement in subsection 820 ‑ 85(3); and (b) the average value, for that year, of the entity’s * cost ‑ free debt capital that is covered by step 5 of that method statement; (disregarding any amount that is attributable to the entity’s * overseas permanent establishments in working out the average values). 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. Note: The disallowed amount also does not form part of the cost base of a CGT asset. See section 110 ‑ 54.

Amendment history: Inserted by No 162 of 2001, effective Sch 1 (items 1, 14–16) and Sch 2: 1 July 2001 (s 2(1)) Sch 1 (items 17, 19): 15 July 2001 (s 2(2)(b)) Sch 1 (item 18): 1 July 2002 (s 2(3)(b)) | Amended by No 53 of 2002, effective Schedules 3 and 4: 1 July 2002 Remainder: Royal Assent | Amended by No 142 of 2003, effective s 4, Sch 1 (items 1–15, 18–40), Sch 2 (items 1, 2, 4–29, 33–49, 52, 53), Sch 3, Sch 7 (items 1–23) and Sch 8 (items 4–17, 17A, 17B, 18–21, 24(2), (3)): 17 Dec 2003 (s 2(1) items 1–5, 10, 11, 13) | Amended by No 23 of 2024, effective sch 2 (items 3 ‑ 142, 144 ‑ 146): 1 July 2024 (s 2(1) item 3)

s 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 financial 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. 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 * borrowed securities amount. Step 5. Add to the result of step 4 the average value, for that period, of the * cost ‑ free debt capital of the entity. 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 2 Section 820 ‑ 115 A reference to subsection 820 ‑ 85(1) is taken to be a reference to subsection (1) of this section 3 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 sum of: (a) the average value, for that period, of the entity’s * debt capital that is covered by step 1 of the method statement in subsection (2) of this section; and (b) the average value, for that period, of the entity’s * cost ‑ free debt capital that is covered by step 5 of that method statement; (disregarding any amount that is attributable to the entity’s * overseas permanent establishments in working out the average values).

Amendment history: Inserted by No 162 of 2001, effective Sch 1 (items 1, 14–16) and Sch 2: 1 July 2001 (s 2(1)) Sch 1 (items 17, 19): 15 July 2001 (s 2(2)(b)) Sch 1 (item 18): 1 July 2002 (s 2(3)(b)) | Amended by No 53 of 2002, effective Schedules 3 and 4: 1 July 2002 Remainder: Royal Assent | Amended by No 142 of 2003, effective s 4, Sch 1 (items 1–15, 18–40), Sch 2 (items 1, 2, 4–29, 33–49, 52, 53), Sch 3, Sch 7 (items 1–23) and Sch 8 (items 4–17, 17A, 17B, 18–21, 24(2), (3)): 17 Dec 2003 (s 2(1) items 1–5, 10, 11, 13) | Amended by No 58 of 2006, effective s. 4, Schedules 1, 2, Schedule 3 (items 1–3, 7), Schedule 4, Schedule 5 (items 1–3) and Schedule 7 (items 51–113, 213–216, 257–263): Royal Assent Sch 7 (items 179–188): 1 July 2004 (s 2(1) item 15) Sch 7 (item 189): 5 July 1999 (s 2(1) item 16) Sch 7 (item 190): 30 June 2000 (s 2(1) item 17) Sch 7 (item 191): 24 Oct 2002 (s 2(1) item 18) Sch 7 (item 192): 30 June 2004 (s 2(1) item 19) Sch 7 (item 193): 22 Dec 1999 (s 2(1) item 20) | Amended by No 23 of 2024, effective sch 2 (items 3 ‑ 142, 144 ‑ 146): 1 July 2024 (s 2(1) item 3)

s 820-180 — What this Subdivision is about

This Subdivision sets out the thin capitalisation rules that apply to an entity that is an inward investing financial entity (non ‑ ADI) for all of an income year (but not an outward investing financial entity (non ‑ ADI) for all or any part of that year). 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 financial entities (non ‑ ADI) 820 ‑ 190 Maximum allowable debt 820 ‑ 200 Safe harbour debt amount—inward investment vehicle (financial) 820 ‑ 210 Safe harbour debt amount—inward investor (financial) 820 ‑ 217 Worldwide gearing debt amount—inward investment vehicle (financial) 820 ‑ 219 Worldwide gearing debt amount—inward investor (financial) 820 ‑ 220 Amount of debt deduction disallowed 820 ‑ 225 Application to part year periods

Amendment history: Inserted by No 162 of 2001, effective Sch 1 (items 1, 14–16) and Sch 2: 1 July 2001 (s 2(1)) Sch 1 (items 17, 19): 15 July 2001 (s 2(2)(b)) Sch 1 (item 18): 1 July 2002 (s 2(3)(b)) | Amended by No 23 of 2024, effective sch 2 (items 3 ‑ 142, 144 ‑ 146): 1 July 2024 (s 2(1) item 3)

s 820-185 — Thin capitalisation rule for inward investing financial entities (non ‑ ADI)

Thin capitalisation rule (1A) Subsection (1) applies if: (a) an entity is an * inward investing financial entity (non ‑ ADI) (see subsection (2)) for all of an income year, but is not also an * outward investing financial entity (non ‑ ADI) (see section 820 ‑ 85) for all or any part of that year; and (b) either: (i) the entity has made a choice under subsection (2C) in relation to the income year; or (ii) otherwise—the entity’s * adjusted average debt (see subsection (3)) for the income year exceeds its * maximum allowable debt (see section 820 ‑ 190) for the income year. Note: 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. (1) This subsection disallows: (a) if paragraph (1A)(b)(i) applies—all or part of the entity’s * debt deductions for the income year; or (b) if paragraph (1A)(b)(ii) applies—all or a part of each debt deduction of the entity for the income year. Note 1: To work out the amount to be disallowed, see section 820 ‑ 220. Note 2: For the rules that apply to an entity that is an outward investing financial entity (non ‑ ADI) as well as an inward investing financial entity (non ‑ ADI), see Subdivision 820 ‑ B. Note 3: For the rules that apply to an entity that is an inward investing financial entity (non ‑ ADI) for only a part of an income year, see section 820 ‑ 225 in conjunction with subsection (2) of this section. Note 4: To calculate an average value for the purposes of this Division, see Subdivision 820 ‑ G. Note 5: A consolidated group or MEC group may be an inward investing financial entity (non ‑ ADI) to which this Subdivision applies: see Subdivisions 820 ‑ FA and 820 ‑ FB. Inward investing financial entity (non ‑ ADI) (2) The entity is an inward investing financial entity (non ‑ ADI) for a period that is all or a part of an income year if, and only if, it is: (b) an * inward investment vehicle (financial) for that period (as set out in item 1 of the following table); or (d) an * inward investor (financial) for that period (as set out in item 2 of that table). Inward investing financial 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 a * financial entity throughout that period inward investment vehicle (financial) for that period 2 * 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: An entity covered by item 2 of the table may be required to keep certain records, see Subdivision 820 ‑ L. (2A) However, the entity is not an inward investing financial entity (non ‑ 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 ). (2C) An entity that is an * inward investing financial entity (non ‑ ADI) for a period that is all or part of an income year may make a choice under this subsection to apply the third party debt test in relation to that income year. (2D) Section 820 ‑ 47 applies in relation to a choice under subsection (2C) in the same way that it applies in relation to a choice under subsection 820 ‑ 46(3) or (4). 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 (financial) for that year—all the * associate entity debt of the entity; or (b) if the entity is 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 the relevant year, of the entity’s * borrowed securities amount. Step 4. Add to the result of step 3 the average value, for the relevant year, of the * cost ‑ free debt capital of the entity. 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.

Amendment history: Inserted by No 162 of 2001, effective Sch 1 (items 1, 14–16) and Sch 2: 1 July 2001 (s 2(1)) Sch 1 (items 17, 19): 15 July 2001 (s 2(2)(b)) Sch 1 (item 18): 1 July 2002 (s 2(3)(b)) | Amended by No 53 of 2002, effective Schedules 3 and 4: 1 July 2002 Remainder: Royal Assent | Amended by No 142 of 2003, effective s 4, Sch 1 (items 1–15, 18–40), Sch 2 (items 1, 2, 4–29, 33–49, 52, 53), Sch 3, Sch 7 (items 1–23) and Sch 8 (items 4–17, 17A, 17B, 18–21, 24(2), (3)): 17 Dec 2003 (s 2(1) items 1–5, 10, 11, 13) | Amended by No 101 of 2006, effective Schedules 3 and 4: 1 Jan 2008 Remainder: Royal Assent | Amended by No 110 of 2014, effective Sch 1 and Sch 2 (items 2–5, 13–23): 17 Oct 2014 (s 2(1) item 2) Sch 3, Sch 4 (items 1, 3) and Sch 5 (items 16–67, 74–76, 84–91, 98–121): 16 Oct 2014 (s 2(1) items 3–5, 7) | Amended by No 23 of 2024, effective sch 2 (items 3 ‑ 142, 144 ‑ 146): 1 July 2024 (s 2(1) item 3)

s 820-190 — Maximum allowable debt

(1) The entity’s maximum allowable debt for an income year is the greatest of the following amounts: (a) the * safe harbour debt amount; (c) unless subsection (2) applies to the entity—the * worldwide gearing debt amount. Entities that are not eligible for the worldwide gearing debt amount (2) This subsection applies to an entity, if: (a) the entity has * statement worldwide equity, or * statement worldwide assets, of nil or a negative amount; or (b) * audited consolidated financial statements for the entity for the income year do not exist; or (c) the result of applying the following formula is greater than 0.5: where: average Australian assets : (a) of an * Australian entity—is the average value, for the statement period mentioned in subsection (3), of all the assets of the entity, other than: (i) any * debt interests held by the entity, to the extent to which any value of the interests is all or a part of the * controlled foreign entity debt of the entity; or (ii) any * equity interests or debt interests held by the entity, to the extent to which any value of the interests is all or a part of the * controlled foreign entity equity of the entity; and (b) of a * foreign entity—is the average value, for the statement period mentioned in subsection (3), of all the assets of the entity that are: (i) located in Australia; or (ii) attributable to the entity’s * Australian permanent establishments; or (iii) debt interests held by the entity, that were * issued by an * Australian entity and are * on issue; (iv) equity interests held by the entity in an * Australian entity. (3) For the purposes of the definition of average Australian assets in subsection (2) the statement period is the period for which the * audited consolidated financial statements for the entity for the income year have been prepared. (4) For the purposes of the formula in paragraph (2)(c), if: (a) an amount is included in * statement worldwide assets in respect of an asset; and (b) the asset was acquired, held or otherwise dealt with by an entity for a purpose (other than an incidental purpose) that included ensuring that subsection (2) does not apply to an entity; and (c) as a result of the acquisition, holding or dealing with of the asset, the amount included in statement worldwide assets exceeds the amount (including nil) that would otherwise be so included; apply the amount of the excess to reduce statement worldwide assets (or statement worldwide assets as reduced by a previous application of this subsection).

Amendment history: Inserted by No 162 of 2001, effective Sch 1 (items 1, 14–16) and Sch 2: 1 July 2001 (s 2(1)) Sch 1 (items 17, 19): 15 July 2001 (s 2(2)(b)) Sch 1 (item 18): 1 July 2002 (s 2(3)(b)) | Repealed and substituted by No 110 of 2014, effective Sch 1 and Sch 2 (items 2–5, 13–23): 17 Oct 2014 (s 2(1) item 2) Sch 3, Sch 4 (items 1, 3) and Sch 5 (items 16–67, 74–76, 84–91, 98–121): 16 Oct 2014 (s 2(1) items 3–5, 7) | Amended by No 23 of 2024, effective sch 2 (items 3 ‑ 142, 144 ‑ 146): 1 July 2024 (s 2(1) item 3)

s 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 1A. Reduce the result of step 1 by the average value, for that year, of all the * excluded equity interests in the entity. Step 2. Reduce the result of step 1A 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 15 / 16 . 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 excluded equity interests, associate entity debt, associate entity equity, its non ‑ debt liabilities and its zero ‑ capital amount are $5 million, $5 million, $3 million, $2 million and $5 million respectively. Deducting these amounts from the result of step 1 (through applying steps 1A to 5) leaves $100 million. Multiplying $100 million by 15 / 16 results in $93.75 million. Adding the zero ‑ capital amount of $5 million to $93.75 million results in $98.75 million. As the company does not have any associate entity excess amount, the total debt amount is therefore $98.75 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 1A. Reduce the result of step 1 by the average value, for that year, of all the * excluded equity interests in the entity. Step 2. Reduce the result of step 1A 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 / 5 . 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 excluded equity interests, associate entity equity, non ‑ debt liabilities and on ‑ lent amount are $5 million, $3 million, $2 million and $35 million respectively. Deducting these amounts from the result of step 1 (through applying steps 1A to 4) leaves $75 million. Multiplying $75 million by 3 / 5 results in $45 million. Adding the average on ‑ lent amount of $35 million results in $80 million. Reducing $80 million by the associate entity debt amount of $5 million results in $75 million. As the company does not have any associate entity excess amount, the adjusted on ‑ lent amount is therefore $75 million.

Amendment history: Inserted by No 162 of 2001, effective Sch 1 (items 1, 14–16) and Sch 2: 1 July 2001 (s 2(1)) Sch 1 (items 17, 19): 15 July 2001 (s 2(2)(b)) Sch 1 (item 18): 1 July 2002 (s 2(3)(b)) | Amended by No 142 of 2003, effective s 4, Sch 1 (items 1–15, 18–40), Sch 2 (items 1, 2, 4–29, 33–49, 52, 53), Sch 3, Sch 7 (items 1–23) and Sch 8 (items 4–17, 17A, 17B, 18–21, 24(2), (3)): 17 Dec 2003 (s 2(1) items 1–5, 10, 11, 13) | Amended by No 110 of 2014, effective Sch 1 and Sch 2 (items 2–5, 13–23): 17 Oct 2014 (s 2(1) item 2) Sch 3, Sch 4 (items 1, 3) and Sch 5 (items 16–67, 74–76, 84–91, 98–121): 16 Oct 2014 (s 2(1) items 3–5, 7)

s 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 1A. Reduce the result of step 1 by the average value, for that year, of all the * excluded equity interests in the entity. Step 2. Reduce the result of step 1A 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 15 / 16 . 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 excluded equity interests, associate entity debt, associate entity equity, non ‑ debt liabilities and zero ‑ capital amount are $5 million, $5 million, $2 million, $3 million and $5 million respectively. Deducting those amounts from the result of step 1 (through applying steps 1A to 5) leaves $100 million. Multiplying $100 million by 15 / 16 results in $93.75 million. Adding the average zero ‑ capital amount of $5 million results in $98.75 million. As the company does not have any associate entity excess amount, the total debt amount is therefore $98.75 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 1A. Reduce the result of step 1 by the average value, for that year, of all the * excluded equity interests in the entity. Step 2. Reduce the result of step 1A 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 / 5 . 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 excluded equity interests, associate entity equity, non ‑ debt liabilities and on ‑ lent amount are $5 million, $2 million, $3 million and $35 million respectively. Deducting those amounts from the result of step 1 (through applying steps 1A to 4) leaves $75 million. Multiplying $75 million by 3 / 5 results in $45 million. Adding the average on ‑ lent amount of $35 million results in $80 million. Reducing the result of step 6 by the associate entity debt amount of $5 million results in $75 million. As the company does not have any associate entity excess amount, the adjusted on ‑ lent amount is therefore $75 million.

Amendment history: Inserted by No 162 of 2001, effective Sch 1 (items 1, 14–16) and Sch 2: 1 July 2001 (s 2(1)) Sch 1 (items 17, 19): 15 July 2001 (s 2(2)(b)) Sch 1 (item 18): 1 July 2002 (s 2(3)(b)) | Amended by No 142 of 2003, effective s 4, Sch 1 (items 1–15, 18–40), Sch 2 (items 1, 2, 4–29, 33–49, 52, 53), Sch 3, Sch 7 (items 1–23) and Sch 8 (items 4–17, 17A, 17B, 18–21, 24(2), (3)): 17 Dec 2003 (s 2(1) items 1–5, 10, 11, 13) | Amended by No 110 of 2014, effective Sch 1 and Sch 2 (items 2–5, 13–23): 17 Oct 2014 (s 2(1) item 2) Sch 3, Sch 4 (items 1, 3) and Sch 5 (items 16–67, 74–76, 84–91, 98–121): 16 Oct 2014 (s 2(1) items 3–5, 7)

s 820-217 — Worldwide gearing debt amount—inward investment vehicle (financial)

If the entity is an * inward investment vehicle (financial) for the income year, and is not also an * outward investing financial entity (non ‑ ADI) for all or any part of that year, the worldwide gearing debt amount is the result of applying the method statement in this section. Method statement Step 1. Divide the entity’s * statement worldwide debt for the income year by the entity’s * statement worldwide equity for that year. Step 2. Add 1 to the result of step 1. Step 3. Divide the result of step 1 by the result of step 2. Step 4. Multiply the result of step 3 in this method statement by the result of step 5 in the method statement in subsection 820 ‑ 200(2). Step 5. Add to the result of step 4 the average value, for that year, of the entity’s * zero ‑ capital amount. 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: RGR Limited, a company that is an Australian entity, has a worldwide parent entity in France. RGR Limited has statement worldwide debt of $90 million and statement worldwide equity of $30 million. The result of applying step 1 is therefore 3. Dividing 3 by 4 (through applying steps 2 and 3) and multiplying the result by $100 million (which is the result of step 5 of the method statement in subsection 820 ‑ 200(2)) equals $75 million. The zero capital amount is $5 million. Adding that amount to $75 million results in $80 million. As the company does not have any associate entity excess amount, the worldwide gearing debt amount is therefore $80 million.

Amendment history: Inserted by No 110 of 2014, effective Sch 1 and Sch 2 (items 2–5, 13–23): 17 Oct 2014 (s 2(1) item 2) Sch 3, Sch 4 (items 1, 3) and Sch 5 (items 16–67, 74–76, 84–91, 98–121): 16 Oct 2014 (s 2(1) items 3–5, 7) | Amended by No 23 of 2024, effective sch 2 (items 3 ‑ 142, 144 ‑ 146): 1 July 2024 (s 2(1) item 3)

s 820-219 — Worldwide gearing debt amount—inward investor (financial)

If the entity is an * inward investor (financial) for the income year, the worldwide gearing debt amount is the result of applying the method statement in this section. Method statement Step 1. Divide the entity’s * statement worldwide debt for the income year by the entity’s * statement worldwide equity for that year. Step 2. Add 1 to the result of step 1. Step 3. Divide the result of step 1 by the result of step 2. Step 4. Multiply the result of step 3 in this method statement by the result of step 5 in the method statement in subsection 820 ‑ 210(2). Step 5. Add to the result of step 4 the average value, for that year, of the entity’s * zero ‑ capital amount that has arisen because of the Australian investments mentioned in step 1 of the method statement in subsection 820 ‑ 210(2). 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: MSR Limited, a company that is not an Australian entity, has investments in Australia. MSR Limited has statement worldwide debt of $90 million and statement worldwide equity of $30 million. The result of applying step 1 is therefore 3. Dividing 3 by 4 (through applying steps 2 and 3) and multiplying the result by $100 million (which is the result of step 5 of the method statement in subsection 820 ‑ 210(2)) equals $75 million. The zero ‑ capital amount is $5 million. Adding that amount to $75 million results in $80 million. As the company does not have any associate entity excess amount, the worldwide gearing debt amount is therefore $80 million.

Amendment history: Inserted by No 110 of 2014, effective Sch 1 and Sch 2 (items 2–5, 13–23): 17 Oct 2014 (s 2(1) item 2) Sch 3, Sch 4 (items 1, 3) and Sch 5 (items 16–67, 74–76, 84–91, 98–121): 16 Oct 2014 (s 2(1) items 3–5, 7)

s 820-220 — Amount of debt deduction disallowed

(1) If subparagraph 820 ‑ 185(1A)(b)(i) applies, the amount (the total disallowed amount ) disallowed under subsection 820 ‑ 185(1) of the * debt deductions of an entity for an income year is the amount by which those debt deductions exceed the entity’s * third party earnings limit for the income year (see section 820 ‑ 427A). Note: The disallowed amount also does not form part of the cost base of a CGT asset. See section 110 ‑ 54. (2) The amount by which a particular * debt deduction is disallowed as a result of subsection (1) is worked out as follows: (a) first, divide the total disallowed amount by the * debt deductions of the entity for the income year; (b) next, multiply the amount of the particular debt deduction by the result of paragraph (a). (3) If subparagraph 820 ‑ 185(1A)(b)(ii) applies, the amount of a * debt deduction of an entity for an income year disallowed under subsection 820 ‑ 185(1) is worked out using the following formula: where: average debt means the sum of: (a) the average value, for the income year, of the entity’s * debt capital that is covered by step 1 of the method statement in subsection 820 ‑ 185(3); and (b) the average value, for that year, of the entity’s * cost ‑ free debt capital that is covered by step 4 of that method statement. debt deduction means each * debt deduction of the entity for that year. excess debt means the amount by which the * adjusted average debt (see subsection 820 ‑ 185(3)) exceeds the entity’s * maximum allowable debt for that year. Note: The disallowed amount also does not form part of the cost base of a CGT asset. See section 110 ‑ 54.

Amendment history: Inserted by No 162 of 2001, effective Sch 1 (items 1, 14–16) and Sch 2: 1 July 2001 (s 2(1)) Sch 1 (items 17, 19): 15 July 2001 (s 2(2)(b)) Sch 1 (item 18): 1 July 2002 (s 2(3)(b)) | Amended by No 53 of 2002, effective Schedules 3 and 4: 1 July 2002 Remainder: Royal Assent | Amended by No 142 of 2003, effective s 4, Sch 1 (items 1–15, 18–40), Sch 2 (items 1, 2, 4–29, 33–49, 52, 53), Sch 3, Sch 7 (items 1–23) and Sch 8 (items 4–17, 17A, 17B, 18–21, 24(2), (3)): 17 Dec 2003 (s 2(1) items 1–5, 10, 11, 13) | Amended by No 23 of 2024, effective sch 2 (items 3 ‑ 142, 144 ‑ 146): 1 July 2024 (s 2(1) item 3)

s 820-225 — 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, if: (a) the entity is an * inward investing financial entity (non ‑ ADI) for that period, but is not also an * outward investing financial entity (non ‑ ADI) for all or any part of 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 inward investing financial entity (non ‑ ADI) for a period, see subsection 820 ‑ 185(2). (2) The entity’s adjusted average debt for that period is the result of applying the method statement in this subsection. 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: (a) if the entity is an * inward investment vehicle (financial) for that period—all the * associate entity debt of the entity; or (b) if the entity is an * inward investor (financial) for that period—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 that period, add to the result of step 2 the average value, for that period, of the entity’s * borrowed securities amount. Step 4. Add to the result of step 3 the average value, for that period, of the * cost ‑ free debt capital of the entity. 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. (2A) The entity’s * adjusted average debt does not exceed its * maximum allowable debt if the adjusted average debt is nil or a negative amount. (3) 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 ‑ 190 to 820 ‑ 220 apply in relation to that entity and that period with the modifications set out in the following table: Modifications of sections 820 ‑ 190 to 820 ‑ 220 Item Provisions Modifications 1 Sections 820 ‑ 190 to 820 ‑ 220 A reference to an income year is taken to be a reference to that period 2 Section 820 ‑ 220 A reference to subsection 820 ‑ 185(1) is taken to be a reference to subsection (1) of this section 3 Section 820 ‑ 220 adjusted average debt is taken to have the meaning given by subsection (2) of this section average debt is taken to be the sum of: (a) the average value, for that period, of the entity’s * debt capital that is covered by step 1 of the method statement in subsection (2) of this section; and (b) the average value, for that period, of the entity’s * cost ‑ free debt capital that is covered by step 4 of that method statement.

Amendment history: Inserted by No 162 of 2001, effective Sch 1 (items 1, 14–16) and Sch 2: 1 July 2001 (s 2(1)) Sch 1 (items 17, 19): 15 July 2001 (s 2(2)(b)) Sch 1 (item 18): 1 July 2002 (s 2(3)(b)) | Amended by No 53 of 2002, effective Schedules 3 and 4: 1 July 2002 Remainder: Royal Assent | Amended by No 142 of 2003, effective s 4, Sch 1 (items 1–15, 18–40), Sch 2 (items 1, 2, 4–29, 33–49, 52, 53), Sch 3, Sch 7 (items 1–23) and Sch 8 (items 4–17, 17A, 17B, 18–21, 24(2), (3)): 17 Dec 2003 (s 2(1) items 1–5, 10, 11, 13) | Amended by No 58 of 2006, effective s. 4, Schedules 1, 2, Schedule 3 (items 1–3, 7), Schedule 4, Schedule 5 (items 1–3) and Schedule 7 (items 51–113, 213–216, 257–263): Royal Assent Sch 7 (items 179–188): 1 July 2004 (s 2(1) item 15) Sch 7 (item 189): 5 July 1999 (s 2(1) item 16) Sch 7 (item 190): 30 June 2000 (s 2(1) item 17) Sch 7 (item 191): 24 Oct 2002 (s 2(1) item 18) Sch 7 (item 192): 30 June 2004 (s 2(1) item 19) Sch 7 (item 193): 22 Dec 1999 (s 2(1) item 20) | Amended by No 23 of 2024, effective sch 2 (items 3 ‑ 142, 144 ‑ 146): 1 July 2024 (s 2(1) item 3)

s 820-295 — What this Subdivision is about

This Subdivision sets out the thin capitalisation rules that apply to an entity that is both an authorised deposit ‑ taking institution (an ADI ) and an Australian entity that has certain types of overseas investments. These rules deal with the following matters: • how to work out the entity’s minimum capital amount for an income year; • how all or a part of the debt deductions claimed by the entity may be disallowed if the minimum capital amount is not reached; • how to apply these rules to a period that is less than an income year. Table of sections Operative provisions 820 ‑ 300 Thin capitalisation rule for outward investing entities (ADI) 820 ‑ 305 Minimum capital amount 820 ‑ 310 Safe harbour capital amount 820 ‑ 315 Arm’s length capital amount 820 ‑ 320 Worldwide capital amount 820 ‑ 325 Amount of debt deduction disallowed 820 ‑ 330 Application to part year periods

Amendment history: Inserted by No 162 of 2001, effective Sch 1 (items 1, 14–16) and Sch 2: 1 July 2001 (s 2(1)) Sch 1 (items 17, 19): 15 July 2001 (s 2(2)(b)) Sch 1 (item 18): 1 July 2002 (s 2(3)(b))

s 820-300 — Thin capitalisation rule for outward investing entities (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 (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 (a related investor ) to which subsection (2AA) applies for that period. Note: To determine whether an entity is an Australian controller of an Australian controlled foreign entity, see Subdivision 820 ‑ H. (2AA) This subsection applies to a related investor for a period if at all times during the period: (a) it is an * outward investing financial entity (non ‑ ADI); or (b) it is an * outward investing entity (ADI); or (c) both: (i) it is a * general class investor; and (ii) assuming that it were a * financial entity, it would be an outward investing financial entity (non ‑ ADI). (2A) However, the entity is not an outward 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 ). 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).

Amendment history: Inserted by No 162 of 2001, effective Sch 1 (items 1, 14–16) and Sch 2: 1 July 2001 (s 2(1)) Sch 1 (items 17, 19): 15 July 2001 (s 2(2)(b)) Sch 1 (item 18): 1 July 2002 (s 2(3)(b)) | Amended by No 142 of 2003, effective s 4, Sch 1 (items 1–15, 18–40), Sch 2 (items 1, 2, 4–29, 33–49, 52, 53), Sch 3, Sch 7 (items 1–23) and Sch 8 (items 4–17, 17A, 17B, 18–21, 24(2), (3)): 17 Dec 2003 (s 2(1) items 1–5, 10, 11, 13) | Amended by No 101 of 2006, effective Schedules 3 and 4: 1 Jan 2008 Remainder: Royal Assent | Amended by No 90 of 2010, effective Sch 2, Sch 4 (items 5–8) and Sch 5 (items 1–3, 6–8): 29 June 2010 (s 2(1) item 3) | Amended by No 110 of 2014, effective Sch 1 and Sch 2 (items 2–5, 13–23): 17 Oct 2014 (s 2(1) item 2) Sch 3, Sch 4 (items 1, 3) and Sch 5 (items 16–67, 74–76, 84–91, 98–121): 16 Oct 2014 (s 2(1) items 3–5, 7) | Amended by No 23 of 2024, effective sch 2 (items 3 ‑ 142, 144 ‑ 146): 1 July 2024 (s 2(1) item 3) | Amended by No 136 of 2024, effective sch 5, sch 6 (items 12 ‑ 21): 1 Jan 2025 (s 2(1) items 10, 12)

s 820-305 — Minimum capital amount

The entity’s minimum capital amount for an income year is the least of the following amounts: (a) the * safe harbour capital amount; (b) the * arm’s length capital amount; (c) the * worldwide capital amount. Note: The entity cannot use the worldwide capital amount if the entity is also a foreign controlled Australian entity throughout that year, see section 820 ‑ 320.

Amendment history: Inserted by No 162 of 2001, effective Sch 1 (items 1, 14–16) and Sch 2: 1 July 2001 (s 2(1)) Sch 1 (items 17, 19): 15 July 2001 (s 2(2)(b)) Sch 1 (item 18): 1 July 2002 (s 2(3)(b))

s 820-310 — Safe harbour capital amount

(1) The safe harbour capital 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 entity’s: (aa) * risk ‑ weighted assets; and (ab) intangible assets comprising capitalised software expenses; that are attributable to none of the following: (a) the entity’s * overseas permanent establishments; (b) assets comprised by the * controlled foreign entity equity of the entity (other than controlled foreign entity equity attributable to the entity’s overseas permanent establishments); (c) assets for which * prudential capital deductions must be made by the entity (other than prudential capital deductions attributable to the entity’s overseas permanent establishments). Step 2. Multiply the result of step 1 by 6%. Step 3. Add to the result of step 2 the average value, for that year, of all the * tier 1 prudential capital deductions for the entity, to the extent that they are not attributable to: (a) any of the entity’s * overseas permanent establishments; or (b) any * Australian controlled foreign entities of which the entity is an * Australian controller; or (c) any of the entity’s goodwill or intangible assets which relate to the excess mentioned in paragraph 5.3 of * accounting standard AASB 1038, as issued on 17 November 1998, to the extent that the excess is referrable to * VBIF; or Note: Paragraph 5.3 of that accounting standard applies to any excess of the net market values of an interest in a subsidiary over the net amount of that subsidiary’s assets and liabilities. (d) any of the entity’s intangible assets comprising capitalised software expenses. The result of this step is the safe harbour capital amount . Example: The Southern Cross Bank is an Australian bank that carries on its banking business through its overseas permanent establishments and through foreign entities that it controls. For the income year, its average value of risk ‑ weighted assets and intangible assets comprising capitalised software expenses is $150 million (having discounted those assets that are excluded by step 1) and the average value of its relevant tier 1 prudential capital deductions is $2 million. Multiplying $150 million by 6% equals $9 million, which is the result of step 2. Adding $2 million to $9 million equals $11 million, which is the safe harbour capital amount. (2) VBIF is the value of business in force at the time of acquisition of the relevant subsidiary (within the meaning of paragraph 5.3 of * accounting standard AASB 1038, as issued on 17 November 1998) of the entity. (3) * VBIF is taken to be nil at all times unless the value of VBIF at the time of acquisition of the relevant subsidiary was worked out by an * actuary according to Australian actuarial practice.

Amendment history: Inserted by No 162 of 2001, effective Sch 1 (items 1, 14–16) and Sch 2: 1 July 2001 (s 2(1)) Sch 1 (items 17, 19): 15 July 2001 (s 2(2)(b)) Sch 1 (item 18): 1 July 2002 (s 2(3)(b)) | Amended by No 90 of 2010, effective Sch 2, Sch 4 (items 5–8) and Sch 5 (items 1–3, 6–8): 29 June 2010 (s 2(1) item 3) | Amended by No 110 of 2014, effective Sch 1 and Sch 2 (items 2–5, 13–23): 17 Oct 2014 (s 2(1) item 2) Sch 3, Sch 4 (items 1, 3) and Sch 5 (items 16–67, 74–76, 84–91, 98–121): 16 Oct 2014 (s 2(1) items 3–5, 7)