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Question 19

Last updated 8 November 2011

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

QC24292