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  • Appendix 2: Royalties

    Royalties include consideration of any kind paid or credited for:

    • the use of, or right to use
      • any copyright, patent, design or model, plan, secret formula or process, trademark or other like property or right
      • industrial, commercial or scientific equipment
      • motion picture films
      • films or video tapes for use with television
      • tapes for use with radio broadcasting
      • visual images and or sounds transmitted by satellite, cable, optic fibre or other similar technology, in connection with television or radio broadcasting
      • capacity covered by a spectrum licence under the Radio Communications Act 1992
       
    • the supply of scientific, technical, industrial or commercial knowledge or information
    • the supply of any assistance that is ancillary and subsidiary to, and is furnished as a means of enabling the application or enjoyment of any property, right, equipment, knowledge or information mentioned in 1a, 1b or 2
    • the reception of, or the right to receive, visual images or sounds transmitted to the public by satellite, cable, optic fibre or similar technology
    • the total or partial forbearance in respect of the previously listed activities.

    Show royalties derived by an Australian resident as income in the normal manner.

    Royalties paid by a resident to a non-resident may be subject to withholding tax. The rate for royalties is 30% however if there is a double tax agreement, the rate may be reduced.

    For more information, see IT 2660 Income tax: definition of royalties.

    Record keeping

    If the trust claims a deduction for royalties paid or credited, keep a record of the name and address and the amounts paid or due to each person. If payment was made to a non-resident, keep details on whether or not tax has been paid or an amount withheld to provide for tax payable by the non-resident.

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    Appendix 3: Thin capitalisation

    The thin capitalisation provisions reduce certain expenditure (called debt deductions) incurred in obtaining and servicing debt where the debt used to finance the Australian operations of a trust exceeds the limits set out in Division 820 of the ITAA 1997. These rules ensure that taxpayers fund their Australian operations with an appropriate amount of equity.

    What if the thin capitalisation rules affect you?

    If the thin capitalisation rules affect you, the trust must complete the International dealings schedule 2022, unless the trust was a subsidiary member of a consolidated group or MEC group for the entire income year.

    Where the trust is a member of a consolidated group or MEC group for the whole income year and the thin capitalisation rules apply, the responsibility for preparing the schedule will rest on the head company of the group.

    Where a return is required because the trust had a period in the income year when it was not a member of a consolidated group or MEC group (a non-membership period) the trust should complete an International dealings schedule 2022 where the thin capitalisation rules apply to the trust during the non-membership period.

    For more information on reporting multiple non-membership periods during the year, see the Consolidation reference manual, sheet C9-5-110.

    The International dealings schedule is available through the PLS or complete and lodge the paper schedule.

    For more information, see

    What if the thin capitalisation rules are breached?

    If the thin capitalisation rules are breached, some of the trust’s debt deductions may be denied. The amount denied for business income is shown in item 5 – label B Expense reconciliation adjustments. If the trust incurred debt deductions for other types of income (for example, rental income, dividend income or foreign income) the amount of deductions shown at the relevant entries must exclude the debt deductions denied.

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    Appendix 4: Commercial debt forgiveness

    If a commercial debt owed by the trust is forgiven during the income year, apply the ‘net forgiven amount’ of that debt to reduce the trust’s tax losses, net capital losses, certain undeducted revenue or capital expenditure and the cost base of CGT assets, in that order.

    A debt is a commercial debt if any part of the interest payable on the debt is or would be an allowable deduction, or could have been deducted but for a specific exception provision in the ITAA 1997 (other than the exceptions in subsection 8-1(2) for outgoings of a capital nature, private or domestic outgoings and for outgoings relating to exempt income or non-assessable income non-exempt income).

    Where interest is not payable, a debt is still a commercial debt if interest would have been deductible if interest had been charged.

    A debt is forgiven if the trust’s obligation to pay the debt is released, waived, or otherwise extinguished, other than by repaying the debt in full.

    A debt is also forgiven if:

    • the right to recover it ceases because of the expiry of a limitation period
    • a creditor assigns it to an associate of the debtor
    • the debtor is a trust and the creditor is issued units in the trust in exchange for the debt
    • an agreement is entered into under which the obligation to pay some or all of the debt will end without the debtor incurring any obligation (other than an insignificant obligation).

    Calculation of net forgiven amount

    Calculate the net forgiven amount as follows:

    • Determine the value of the debt. This is usually the lesser of  
      • the market value of the debt at the time of forgiveness (assuming the trust was solvent at the time the debt was incurred and the trust’s capacity to pay the debt has not changed from the time the debt was incurred), and
      • the sum of the market value of the debt at the time the debt was forgiven (based on the above assumptions and assuming that interest rates and currency exchange rates that affect the market value of the debt remain constant from the time the debt was incurred until the forgiveness time) plus any amounts allowable as deductions because of the forgiveness of the debt that are attributable to changes in those interest rates and currency exchange rates. This might occur because of a decrease in the value of the debt due to market movements. Special rules apply in calculating the value of non-recourse debt and previously assigned debt; see sections 245-60 and 245-61 of the ITAA 1997.
       
    • Calculate the gross forgiven amount of the debt by subtracting from the value of the debt certain amounts paid or given in respect of the forgiveness; see section 245-65 of the ITAA 1997.
    • Work out the net forgiven amount, by subtracting from the gross forgiven amount, any amount  
      • which has been, or will be, included in the trust’s assessable income for any income year as a result of the forgiveness of the debt
      • by which a deduction otherwise allowable to the trust has been, or will be, reduced as a result of the forgiveness of the debt, except for a reduction under Division 727 of the ITAA 1997 (which is about indirect value shifting) and
      • by which the cost base of any CGT assets of the trust has been, or will be, reduced as a result of the forgiveness of the debt under the CGT provisions of the ITAA 1997.
       

    The balance amount (if any) remaining is the net forgiven amount of that the debt.

    Total the net forgiven amount of each debt forgiven during the income year to arrive at the total net forgiven amount for the income year.

    Application of total net forgiven amount

    Apply this total net forgiven amount to reduce the amounts the trust has in the following categories, in the order listed:

    • tax losses
    • net capital losses
    • certain expenditures, and
    • cost bases of certain CGT assets.

    Within each category, the trust may choose the item against which the total net forgiven amount is applied, provided it is applied to the maximum extent possible within that category. Once the total net forgiven amount is applied against all the amounts in a category, apply any excess against the next category. If there is any excess remaining amount after application against all categories, disregard this excess.

    Tax losses

    These are tax losses from an earlier income year that are undeducted at the beginning of the forgiveness income year.

    Net capital losses

    These are unapplied net capital losses that were made in income years before the forgiveness year and could be applied in working out the debtor’s net capital gain in the forgiveness income year, assuming that the trust had sufficient capital gains.

    Expenditures

    Expenditures against which the total net forgiven amount can be applied are limited to those incurred by the trust before the forgiveness income year which remain undeducted but which, on conditions prevailing at the beginning of the forgiveness income year, would be deductible in that year or future income years. Expenditures mean:

    • expenditure deductible under Division 40 of the ITAA 1997 (capital allowances)
    • expenditure incurred in borrowing money to produce assessable income under section 25-25 of the ITAA 1997
    • expenditure on scientific research
    • R&D expenditure deductible under Division 355 of the ITAA 1997
    • advance revenue expenditure
    • expenditure on acquiring a unit of industrial property to produce assessable income
    • expenditure on assessable income-producing buildings and other capital works.

    There are two principal methods for reducing expenditures:

    • If the deduction is calculated as a percentage of a base amount (for example, deductions for the decline in value of depreciating assets calculated under the prime cost method), make the reduction to the base amount  
      • The effect is that deductions allowable in the forgiveness income year and later income years are reduced.
      • The total amount of deductions allowable is limited to the reduced base amount.
      • The amount of the reduction is treated as if it had been a deduction when calculating any required balancing adjustment amount.
       
    • If the deduction for a particular expenditure is a percentage, fraction or proportion of an amount worked out after taking into account any deductions for the deductible expenditure previously allowed to the trust (for example, deductions for the decline in value of depreciating assets calculated under the diminishing value method), the forgiven amount is taken to have been allowed as a deduction before the forgiveness income year.

    If any deductions are disallowed under the ITAA 1936 or the ITAA 1997 as a result of recouping an amount of expenditure, the recouped expenditure against which the total net forgiven amount was previously reduced is included in the assessable income of the trust in the income year in which it is recouped.

    Cost bases of certain CGT assets

    The cost bases and reduced cost bases of certain CGT assets owned by the trust at the beginning of the forgiveness income year are reduced by the trust’s total net forgiven amount remaining after reducing the expenditures (see Expenditures).

    Assets with cost bases not subject to reduction include those for which a capital gain or capital loss will not arise or is unlikely to arise if a CGT event happens to them, for example, CGT assets acquired before 20 September 1985, trading stock or a personal use asset within the meaning of section 108-20 of the ITAA 1997. Also excluded are CGT assets the cost of which is deductible, such as depreciating assets.

    The trust may choose the CGT assets for which the cost bases and reduced cost bases are to be reduced to the extent of the net forgiven amount. However, the cost bases of assets that constitute investments in associates of the trust must be reduced last.

    If a trust chooses to apply an amount to reduce the cost base or the reduced cost base of a CGT asset, then at any time on or after the beginning of the forgiveness income year, the cost base and reduced cost base of each relevant CGT asset is taken to be reduced by that amount.

    Ordinarily, the reduction of a CGT asset’s cost base and reduced cost base cannot exceed the amount that would have been the reduced cost base of the asset, calculated as if the asset was disposed of at market value on the first day of the forgiveness income year.

    However, a special rule applies (see subsection 245-190(3) of the ITAA 1997) if an event occurred after the beginning of the forgiveness income year that would cause the reduced cost base of the asset to be reduced. In this case, the net forgiven amount is applied to the reduced cost base of the asset after the event occurred that reduced the asset cost base, not at the first day of the forgiveness year.

    The reduction of the cost base and reduced cost base of a CGT asset affects the calculation of the amount of the capital gain or capital loss on a CGT event happening to the relevant CGT asset. This is because the cost base or reduced cost base that is taken into account in determining the capital gain or capital loss must reflect that reduction.

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    Last modified: 26 May 2022QC 68031