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13.2.2. Entities Affected

As already noted, the thin capitalization provisions cover persons undertaking both outward and inward investments. Thus, they apply to both "outward investing entities" and "inward investing entities".

An outward investing entity is one that:

  • carries on business through a foreign permanent establishment;
  • has a prescribed controlling interest in certain Australian-controlled foreign entities (i.e. CFC, trust or corporate limited partnership) or is a general partner in a foreign corporate limited partnership; or
  • is an associate entity (as defined) of another outward investing entity.

An inward investing entity is:

  • one in which five or a lesser number of foreign entities hold a controlling interest of at least 50% (effective 1 July 2018, controlling interest of at least 10% is applicable to trusts and partnerships); or
  • an Australian entity over which a foreign entity has de facto effective control.

In the case of group companies (see Sec. 5.3.), the thin capitalization rules apply to the entire group as a single company, with the head company becoming the identified representative for the group.

The manner in which the thin capitalization provisions apply to the above entities depends on whether the entity is an authorized deposit-taking institution (ADI), or a "general" or "financial" entity. ADIs are generally institutions registered as such under Australia’s Banking Act 1959 and include both Australian-owned banks and foreign banks carrying on business in Australia through a branch. Financial entities are securitization vehicles or entities registered or licensed to operate as such under specific Australian laws (i.e. the Financial Sector (Collection of Data) Act 2001 and the Corporations Act 2001), which also satisfy additional prescribed conditions. Under certain conditions, such financial entities may elect to be subject to the rules applicable to ADIs. All other entities may broadly be classified as "general" entities.

Effective 1 July 2019, non-ADI foreign controlled Australian tax consolidated groups and multiple entry consolidated groups that have foreign investments or operations are treated as both outward investing and inward investing entities.