background image
13.2.3. Exemptions

Entities exempt from the application of the thin capitalization provisions include those that incur no debt deductions for the income year concerned, Australian resident entities that are neither inward investing entities nor outward investors, and non-foreign controlled outward investors which meet an "assets threshold test" (i.e. the sum of whose average Australian assets, together with the average Australian assets of their associates, as defined, represents 90% or more of the sum of their average total assets and the average total assets of their associates).

The calculation of the average values for this and other purposes (e.g. the determination of the acceptable amount of debt and equity capital – see below) is governed by prescribed rules, which broadly require the use of international financial reporting standards.

Effective 8 May 2019, an entity is required to align the values of their assets, liabilities (including debt capital) and equity capital for thin capitalisation purposes with the values included in their financial statements and revaluation of assets specifically for thin capitalization purposes is not permissible. Transitional provisions for the said amendments are available for income years beginning before 1 July 2019 as per the domestic laws.

Subject to certain conditions, special purpose entities may also be exempt from the application of the thin capitalization provisions.

Furthermore, as a de minimis rule, the thin capitalization provisions will not be invoked where the total debt incurred by a foreign company and its associates does not exceed AUD 2 million in the income year concerned.