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Thin capitalization test choices – approved form is used to apply either the group ratio test or the third-party debt test for a particular income year, in line with Division 820 of the Income Tax Assessment Act 1997 (ITAA 1997). This decision is referred to as a thin capitalization test choice.
Only make a choice on this approved form. The chosen thin capitalization test will apply exclusively to the specified income year.
Who can use this form
Use this form to make a thin capitalization test choice if all of the following conditions apply:
You want to make a thin capitalization test choice for a specific income year.
You are a general class investor, an outward investing financial entity (non-ADI), or an inward investing financial entity (non-ADI) for that income year.
You do not meet the requirements of section 820-37 of the ITAA 1997 (the 90% Australian asset threshold exemption) for that income year.
Note: Outward-investing financial entities (non-ADI) and inward-investing financial entities (non-ADI) can only choose to apply the third-party debt test.
Consequences of making a choice
Here are a few important points to keep in mind when making a thin capitalization test choice:
Deemed choices: Choosing to apply the third-party debt test for a given income year may have implications for other entities. For instance, certain entities may be deemed to have automatically made the same choice for that year.
Fixed ratio test disallowed amounts: If you're a general class investor and have carried forward disallowed amounts from applying the fixed ratio test (FRT) in previous income years, making a choice to apply either the group ratio test or the third-party debt test will reset those carried forward FRT disallowed amounts to zero. As a result, you won't be able to claim a special deduction for those amounts if you revert to using the FRT in future years.
Debt deduction creation rules: The debt deduction creation rules (DDCR) under Subdivision-EAA of the ITAA 1997 won’t apply in an income year if you have chosen to apply the third-party debt test. However, choosing the group ratio test has no effect on the operation of the DDCR.
Due dates
You must make your thin capitalisation test choice using the approved form by the following deadlines:
On or before the earlier of the day your entity:
lodges its tax return for the income year, or
is required to lodge its tax return for the income year.
Or on a later date allowed by the Commissioner.
How to get the form
This link will download a file.
After completing the form
Once the form is completed, either print a copy or save an electronic version for your records. This will serve as proof that you made a valid choice. There’s no need to submit the form unless the ATO requests it.
For further guidance, our team of professionals is ready to assist. Contact us for your tailored support.