• Question 19

    Attention

    Warning:

    This information may not apply to the current year. Check the content carefully to ensure it is applicable to your circumstances.

    End of attention

    Complete by placing an 'X' in the applicable box. If you answer 'yes', you need to complete the remaining labels as appropriate.

    To complete this question, you will need to:

    • identify all financing arrangements you held during the income year that were undertaken with international related parties and the characterisation between debt and equity is different under Division 974 of the ITAA 1997 from your treatment for accounting purposes
    • identify which of those financing arrangements would be classified as debt interests and which would be classified as equity interests under Division 974 of the ITAA 1997
    • identify which of those financing arrangements you received from a related party and those that you provided to a related party
    • calculate the average quarterly balance of each relevant financing arrangement (by adding the relevant financing arrangement amount at the end of each quarter and dividing by four)
    • add up the total of the average quarterly balances of each financial arrangement that you
      • received from a related party and is characterised as a debt interest under Division 974 of the ITAA 1997
      • provided to a related party and is characterised as a debt interest under Division 974 of the ITAA 1997
      • received from a related party and is characterised as an equity interest under Division 974 of the ITAA 1997
      • provided to a related party and is characterised as an equity interest under Division 974 of the ITAA 1997.
       

    This information will help us assess the risk that an interest has been mischaracterised as either:

    • a debt interest and inappropriate tax deductions have been claimed
    • an equity interest and inappropriate franked distributions have been made.

    The information reported at this question may also help us in:

    • identifying arrangements with international related parties where the use of hybrid instruments may indicate a tax risk
    • assessing any risk regarding your thin capitalisation position.

    The terms debt interest and equity interest are defined in Division 974 of the ITAA 1997.

    Further Information

    For help working out the tax characterisation of an interest as debt or equity (debt and equity tests), refer to:

    End of further information

    Example

    Bob & Co analyses the financial arrangements they held during the income year that were entered into with international related parties.

    Bob & Co identifies the following information:

    Table 1

    Financial arrangements

    Tax treatment

    Received or provided

    Quarter 1

    Quarter 2

    Quarter 3

    Quarter 4

    Redeemable preference shares

    Equity

    Received

    35,000,000

    27,000,000

    42,000,000

    23,000,000

    Convertible notes

    Debt

    Received

    16,800,000

    16,800,000

    16,800,000

    16,800,000

    Perpetual notes

    Debt

    Provided

    31,000,000

    28,500,000

    25,000,000

    22,500,000

    Stapled Security

    Equity

    Received

    27,500,000

    32,500,000

    32,500,000

    0

    Bob & Co then collates the following information for those financial arrangements where the debt equity characterisation under Division 974 of the ITAA 1997 is different from their accounting purposes.

    Table 2

    Financial arrangements

    Average quarterly balances

    Tax treats as debt

    Tax treats as equity

    Received

    Provided

    Received

    Provided

    Redeemable preference shares

    na

    na

    31,750,000

    na

    Convertible notes

    16,800,000

    na

    na

    na

    Perpetual notes

    na

    26,750,000

    na

    na

    Stapled security

    na

    na

    23,125,000

    na

    Totals

    16,800,000

    26,750,000

    54,875,000

    0

    With this information Bob & Co complete question 19 as follows.

    Example of question 19 completed

    Last modified: 09 Nov 2011QC 24292