The Australian Taxation Office has issued guidance regarding the approved form that allows taxpayers to choose between the group ratio test and the third-party debt test.
This form is used when making a choice to apply the group ratio test or third party debt test pursuant to Division 820 of the Income Tax Assessment Act 1997 (ITAA 1997) for an income year. This choice is referred to as a thin capitalisation test choice. Only make a choice on this approved form. A thin capitalisation test choice will apply only in relation to the nominated income year.
Who can use this form
This form is used to make a thin capitalisation test choice if all of the following apply:
- You want to make a thin capitalisation test choice for an income year.
- You are a general class investor, outward investing financial entity (non-ADI) or inward investing financial entity (non-ADI) for the income year.
- You do not meet the requirements in section 820-37 of the ITAA 1997 (the 90% Australian asset threshold exemption) for the income year.
Outward investing financial entities (non-ADI) and inward investing financial entities (non-ADI) can only make a thin capitalisation test choice to apply the third party debt test.
Consequences of making a choice
Matters to consider when you make a thin capitalisation test choice:
Deemed choices
Choosing to apply the third party debt test for an income year may have consequences for other entities. For example, certain entities may be deemed to have made a choice to apply the third party debt test for that income year.
Fixed ratio test disallowed amounts
If you are a general class investor and have carried forward fixed ratio test (FRT) disallowed amounts from applying the FRT in prior income years, a choice to apply the group ratio test or the third party debt test in a subsequent income year will reset those carried forward FRT disallowed amounts to zero. Consequently, you will not be able to claim a special deduction for such FRT disallowed amounts if you revert to using the FRT in a future income year.
Debt deduction creation rules
The debt deduction creation rules (DDCR) in Subdivision-EAA of the ITAA 1997 do not apply for an income year if you have made a choice to use the third party debt test. A choice to use the group ratio test has no effect on the operation of the DDCR.
Due date
A thin capitalisation test choice in relation to an income year must be made in the approved form by the following dates:
- On or before the earlier of the day your entity
- lodges its tax return for the income year
- is required to lodge its tax return for the income year
- A later day allowed by the Commissioner.
