Document ID: chunk:federal_register_of_legislation:C2004A00897:clause:1_4:p3
Version: federal_register_of_legislation:C2004A00897
Segment Type: clause
Provision Reference: sch 1 cl 4 (pt 3/6)
Character Range: 78945–81754

for that year, of all the *tier 1 prudential capital deductions for the entity (to the extent that they are not attributable to any of the entity's *overseas permanent establishments or any *Australian controlled foreign entities of which the entity is an *Australian controller). 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 is $150 million (having discounted those risk‑weighted 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 4% equals $6 million, which is the result of step 2. Adding $2 million to $6 million equals $8 million, which is the safe harbour capital amount.

820‑315  Arm's length capital amount

 (1) The arm's length capital amount is a notional amount that, having regard to:
 (a) the factual assumptions set out in subsection (2); and
 (b) the relevant factors mentioned in subsection (3);
would represent the minimum amount of *equity capital that the entity would reasonably be expected to have in carrying on the Australian business mentioned in subsection (2) throughout the income year if, throughout that year:
 (c) the part of the entity carrying on that business had operated as if it were a separate entity; and
 (d) that separate entity had been dealing at arm's length with:
 (i) the other part of the entity; and
 (ii) all the *Australian controlled foreign entities of which the entity is an *Australian controller.

Note: The entity must keep records in accordance with section 820‑980 if the entity works out an amount under this section.

Factual assumptions

 (2) Irrespective of what actually happened during that year, the following assumptions must be made in working out that minimum amount:
 (a) the entity's commercial activities in connection with Australia (the Australian business) during that year do not include:
 (i) any *business carried on by the entity at or through its *overseas permanent establishments; or
 (ii) the holding of any *controlled foreign entity equity;
 (b) the entity had carried on the Australian business that it actually carried on during that year;
 (c) the nature of the entity's assets and liabilities (to the extent that they are attributable to the Australian business) had been as they were during that year;
 (d) except as mentioned in subsection (1), the entity had carried on the Australian business in the same circumstances as what actually existed during that year.

Relevant factors

 (3) On the basis of the factual assumptions set out in subsection