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DG 11: Interest expenditure: close companies
or “Rules for close companies deducting interest expenses on certain assets”
You could also call this:

“Rules for deducting group company interest expenses based on net asset balance”

This section explains how companies in a group can deduct interest expenses when one company has a net asset balance. Here’s how it works:

If you’re a close company or qualifying company (Company A) with a net asset balance, and you’re in the same group as another company (Company B) that has interest expenses, this rule applies to you.

Company B can deduct a portion of its interest expenses based on Company A’s net asset balance. If Company B’s debt is less than or equal to the net asset balance, it can deduct some of its interest expenses. The amount is calculated using a formula from section DG 11(3B).

If Company B’s debt is more than the net asset balance, it needs to reduce its interest expenses first. It does this by multiplying its interest expenses by the net asset balance divided by its debt value. Then it can deduct a portion of this reduced amount.

Company B can also deduct any remaining interest expenses that would normally be allowed under Part D of the Income Tax Act.

This process continues for each company in the group until the net asset balance is used up or there are no more companies to apply it to.

If there’s still some net asset balance left after this, it can be used under sections DG 13 and DG 14.

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Next up: DG 13: Interest expenditure: corporate shareholders

or “Rules for limiting interest deductions for companies with shares in other companies”
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Part D Deductions
Expenditure related to use of certain assets

DG 12Interest expenditure: group companies

  1. This section applies for an income year when—

  2. a close company or a qualifying company (company A) has a net asset balance; and
    1. company A is part of the same group of companies as another company (company B); and
      1. company B has interest expenditure for which it is allowed a deduction.

        1. This section applies sequentially to every group company B until—

        2. the net asset balance for the income year is reduced to zero, or is treated as reduced to zero; or
          1. no other group companies exist to which this section applies.

            1. If company B's debt value for the income year is equal to or less than the net asset balance for the income year, company B is allowed a deduction of a portion of interest expenditure incurred for the income year,—

            2. of an amount calculated by company A using the formula in section DG 11(3B); and
              1. treating company B's total interest expenditure for the income year as if it were the item interest expenditure in the formula.

                1. In the application of subsection (3), the amount of the net asset balance must be recalculated on each application, being reduced by an amount equal to each counted group company's debt value.

                2. If company B's debt value for the income year is more than the net asset balance for the income year, company B must calculate a reduced amount of interest expenditure for the income year using the formula—

                  interest expenditure × net asset balance ÷ company B’s debt value.

                  Where:

                  • In the formula in subsection (5),—

                  • interest expenditure is the total amount of interest expenditure incurred by company B for the income year:
                    1. net asset balance is the amount of the net asset balance for the income year:
                      1. company B's debt value is the amount of company B's debt value for the income year.

                        1. Company B is allowed a deduction for the income year of a portion of the reduced amount described in subsection (5),—

                        2. of an amount calculated by company A using the formula in section DG 11(3B); and
                          1. treating the reduced amount as if it were the item interest expenditure in the formula.

                            1. Company B is allowed a deduction for the amount of interest expenditure calculated under subsection (7C) to the extent to which the amount would be a deduction under Part D (Deductions) in the absence of this subpart.

                            2. The amount of interest expenditure is calculated using the formula—

                              interest expenditure − reduced amount.

                              Where:

                              • In the formula in subsection (7C),—

                              • interest expenditure is the amount of interest expenditure described in subsection (6)(a):
                                1. reduced amount is the reduced amount of interest expenditure calculated using the formula in subsection (5).

                                  1. Once a calculation is made under subsection (5), company B's net asset balance is treated as zero.

                                  2. If a net asset balance remains outstanding after the application of this section for an income year, the amount must be used under sections DG 13 and DG 14, as applicable.

                                  Notes
                                  • Section DG 12: inserted (with effect on 1 April 2013 and applying for the 2013–14 and later income years for an item of property referred to in section DG 3(2)(a)(i), and for the 2014–15 and later income years for an item of property referred to in section DG 3(2)(a)(ii) and (iii)), on , by section 30(1) of the Taxation (Livestock Valuation, Assets Expenditure, and Remedial Matters) Act 2013 (2013 No 52).
                                  • Section DG 12(3)(a): amended (with effect on 1 April 2013 and applying, for the 2013–14 and later income years, for an item of property referred to in section DG 3(2)(a)(i); for the 2014–15 and later income years, for an item of property referred to in section DG 3(2)(a)(ii) and (iii)), on , by section 104(1) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                                  • Section DG 12(3)(b): amended (with effect on 1 April 2013 and applying, for the 2013–14 and later income years, for an item of property referred to in section DG 3(2)(a)(i); for the 2014–15 and later income years, for an item of property referred to in section DG 3(2)(a)(ii) and (iii)), on , by section 104(2) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                                  • Section DG 12(6): amended (with effect on 1 April 2013), on , by section 104(3) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                                  • Section DG 12(7)(a): amended (with effect on 1 April 2013 and applying, for the 2013–14 and later income years, for an item of property referred to in section DG 3(2)(a)(i); for the 2014–15 and later income years, for an item of property referred to in section DG 3(2)(a)(ii) and (iii)), on , by section 104(4) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                                  • Section DG 12(7)(b): amended (with effect on 1 April 2013 and applying, for the 2013–14 and later income years, for an item of property referred to in section DG 3(2)(a)(i); for the 2014–15 and later income years, for an item of property referred to in section DG 3(2)(a)(ii) and (iii)), on , by section 104(5) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                                  • Section DG 12(7B) heading: inserted (with effect on 1 April 2013 and applying, for the 2013–14 and later income years, for an item of property referred to in section DG 3(2)(a)(i); for the 2014–15 and later income years, for an item of property referred to in section DG 3(2)(a)(ii) and (iii)), on , by section 104(6) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                                  • Section DG 12(7B): inserted (with effect on 1 April 2013 and applying, for the 2013–14 and later income years, for an item of property referred to in section DG 3(2)(a)(i); for the 2014–15 and later income years, for an item of property referred to in section DG 3(2)(a)(ii) and (iii)), on , by section 104(6) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                                  • Section DG 12(7C) heading: inserted (with effect on 1 April 2013 and applying, for the 2013–14 and later income years, for an item of property referred to in section DG 3(2)(a)(i); for the 2014–15 and later income years, for an item of property referred to in section DG 3(2)(a)(ii) and (iii)), on , by section 104(6) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                                  • Section DG 12(7C): inserted (with effect on 1 April 2013 and applying, for the 2013–14 and later income years, for an item of property referred to in section DG 3(2)(a)(i); for the 2014–15 and later income years, for an item of property referred to in section DG 3(2)(a)(ii) and (iii)), on , by section 104(6) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                                  • Section DG 12(7D) heading: inserted (with effect on 1 April 2013 and applying, for the 2013–14 and later income years, for an item of property referred to in section DG 3(2)(a)(i); for the 2014–15 and later income years, for an item of property referred to in section DG 3(2)(a)(ii) and (iii)), on , by section 104(6) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).
                                  • Section DG 12(7D): inserted (with effect on 1 April 2013 and applying, for the 2013–14 and later income years, for an item of property referred to in section DG 3(2)(a)(i); for the 2014–15 and later income years, for an item of property referred to in section DG 3(2)(a)(ii) and (iii)), on , by section 104(6) of the Taxation (Annual Rates for 2015–16, Research and Development, and Remedial Matters) Act 2016 (2016 No 1).