Show download pdf controls
  • 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

    This question seeks to 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 doing both of the following:

    • 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 dollar amounts or values asked for in this question are all based on your accounting records.

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

    To complete this question, you will need to:

    • identify all debt and equity interests you had on issue or which you held during the income year that were on issue to or issued by international related parties and where 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 under which you received finance from a related party and those under which you provided finance 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 under which you
      • received finance from a related party that is characterised as a debt interest under Division 974 of the ITAA 1997
      • provided finance to a related party that is characterised as a debt interest under Division 974 of the ITAA 1997
      • received finance from a related party that is characterised as an equity interest under Division 974 of the ITAA 1997
      • provided finance to a related party that is characterised as an equity interest under Division 974 of the ITAA 1997.
       

    If you had financing arrangements to which this question applies, answer 'Yes' at label A of question 19 and complete the required fields.

    At item 19, label B, write the average quarterly balance of debt interests issued (finance received).

    At item 19, label C, write the average quarterly balance of debt interests held (finance provided.

    At item 19, label D, write the average quarterly balance of equity interests issued (finance received).

    At item 19, label E, write the average quarterly balance of equity interests held (finance provided.

    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 had during the income year that were entered into with international related parties where the debt/equity treatment under Division 974 of the ITAA 1997 is different from the debt/equity treatment for accounting purposes.

    Bob & Co identifies the following information:

    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 treatment for accounting purposes.

    Financial arrangements

    Average quarterly balances

    Div 974 treats as debt

    Div 974 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

    Total

    16,800,000

    26,750,000

    54,875,000

    0

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

    With this information Bob & Co complete question 19

    Last modified: 08 Aug 2014QC 26054