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Overseas transactions or interests/Thin capitalisation

Changes to the thin capitalisation rules to prevent double gearing structures

On 5 April 2019, legislation was enacted to improve the integrity of the income tax law by modifying the thin capitalisation rules to prevent double gearing structures. Double gearing structures involve the use of multiple layers of ‘flow-through’ entities (such as trusts and partnerships) to issue debt against the same underlying asset.

These changes apply to income years starting on or after 1 July 2018.

The changes will affect entities with interests in trusts (other than public trading trusts) and partnerships, as the threshold for the purposes of the associate entity debt, associate entity equity, and the associate entity excess amounts has been reduced from 50% to 10%.

The changes also affect how the arm’s length debt amount is calculated. To determine both the independent lender and independent borrower amounts of the test, an entity must consider the debt-to-equity ratios of any other entity in which it has an interest.

These are mandatory questions and must be answered even if you do not have any overseas transactions or interests. Tax will roll over the answer from the previous year and where that is N, you must review the answers each year.

If the answer to questions 27, 28 or 29 is Y, then you must complete and lodge via PLS a current income year International dealings schedule (IDS):

Where the appropriate information is reported in the Company tax return you must complete an International dealings schedule 2018 (NAT 73345). The International dealings schedule may be completed in MYOB Tax and lodged with the Company return via PLS.

Overseas branch operations include:

  • Business operations carried on by an Australian resident entity at or through a fixed place of business in another country.
  • Business operations carried on by a foreign resident entity at or through a fixed place of business in Australia.
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