Issue
For the purpose of calculating the attributable safe harbour excess amount in section 820-920(4) of the Income Tax Assessment Act 1997 ('ITAA 1997'), can a Step 1 amount, which is zero, when reduced by a negative adjusted average debt amount give rise to a positive Step 2 amount?
Decision
Yes. For the purpose of calculating the attributable safe harbour excess amount in section 820-920(4) of the ITAA 1997, a Step 1 amount, which is zero, when reduced by a negative adjusted average debt amount can give rise to a positive Step 2 amount.
Facts
Entity A has debt capital of $5m. Entity A holds 100% of the equity in Entity B. Entity B has equity of $5m and has not issued any debt interests. Entity B has lent $5m to associates entities in Australia. These entities are associate entities under a combination of the operation of sections 820-905(1)(b) and 820-905(3A) of the ITAA 1997.
Reasons for Decision Section 820-195 of the ITAA 1997 Safe Harbour Debt Amount - inward investment vehicle (general)
The safe harbour debt amount for Entity A is the result of the following method statement: $M Step 1. Average value of all the assets of the entity 5 Step 2. Reduce the result of Step 1 by the average value of all associate entity debt of the entity 0 5 Step 3. Reduce the result of Step 2 by the average value of all associate entity equity of the entity (5) 0 Step 4. Reduce the result of Step 3 by the average value of all the non-debt liabilities of the entity 0 0 Step 5. Multiply the result of Step 4 by 3/4 0 Step 6. Add to the result the average value of the entity's associate entity excess amount ( see below) 5 Safe harbour debt amount 5
$M
Step 1. Average value of all the assets of the entity | 5
Step 2. Reduce the result of Step 1 by the average value of all associate entity debt of the entity | 0
5
Step 3. Reduce the result of Step 2 by the average value of all associate entity equity of the entity | (5)
0
Step 4. Reduce the result of Step 3 by the average value of all the non-debt liabilities of the entity | 0
0
Step 5. Multiply the result of Step 4 by 3/4 | 0
Step 6. Add to the result the average value of the entity's associate entity excess amount ( see below) | 5
Safe harbour debt amount | 5
For all steps in this subsection, Entity B is the associate entity.
The associate entity excess amount is calculated by applying the method statement in subsection 820-920(2). $M Step 1. Work out the premium excess amount (from subsection(3)) for an associate entity. 0 Step 2. Add to the result of Step 1 the attributable safe harbour excess amount (subsection (4)) for that associate entity (see explanation below). 5 Step 3. Apply Steps 1 and 2 to all such associate entities. The result of this step is the associate entity excess amount. 5
$M
Step 1. Work out the premium excess amount (from subsection(3)) for an associate entity. | 0
Step 2. Add to the result of Step 1 the attributable safe harbour excess amount (subsection (4)) for that associate entity (see explanation below). | 5
Step 3. Apply Steps 1 and 2 to all such associate entities. The result of this step is the associate entity excess amount. | 5
The attributable safe harbour excess amount is calculated by applying the method statement in sub-section (4).
For all steps in this subsection, Entity B is the associate entity. $M Step 1. Work out the safe harbour debt amount of the associate entity. 0 Step 2. Reduce the result of Step 1 by the value of the adjusted average debt of the associate entity. (-5) 5 Step 3. Multiply the result of Step 2 by the sum of: (a) the value of all the equity capital of the associate entity that is attributable to the relevant entity; and ... 25 Step 4. Divide the result of Step 3 by the sum of: (a) the value of all the equity capital of the associate entity; and ... 5 The result of this Step is the attributable safe harbour >excess amount 5
$M
Step 1. Work out the safe harbour debt amount of the associate entity. | 0
Step 2. Reduce the result of Step 1 by the value of the adjusted average debt of the associate entity. | (-5)
5
Step 3. Multiply the result of Step 2 by the sum of:
(a) the value of all the equity capital of the associate entity that is attributable to the relevant entity; and ... | 25
Step 4. Divide the result of Step 3 by the sum of:
(a) the value of all the equity capital of the associate entity; and ... | 5
The result of this Step is the attributable safe harbour >excess amount | 5
The method statement follows a mathematical approach. For example, in subsection 820-920(4) of the ITAA 1997, Step 3 of the method statement requires that the amount be 'multiplied' and at Step 4 that it be 'divided'. Following a mathematical approach, the term 'reduce' can be interpreted to mean 'subtract'. In applying the method statement in sub-section 820-920(4) of the ITAA 1997, where an amount is to be 'reduced' by a negative amount the result is a positive amount.