If schemes include finance provided by a related-party financier or preferred financier, we seek to rule on the tax benefits of those finance arrangements. We also provide product rulings on schemes where participants pay the initial period fees to the manager under a terms agreement ('terms payments').
To help promoters structure their arrangement in an acceptable way, we have developed financing principles that reduce the likelihood of Part IVA of the Income Tax Assessment Act 1936 (ITAA 1936) applying.
If financing arrangements are inconsistent with the financing principles, they will be subject to a comprehensive consideration of finance terms, which may include a referral to the General Anti-avoidance Rules Panel. Alternately, those wanting to invest in a scheme with finance terms that are inconsistent with these principles may apply for a private ruling.
Finance
We will not issue a product ruling for an agribusiness arrangement involving non-recourse or limited recourse financing.
Non-recourse or limited recourse financing includes any arrangement where, viewed as a whole, the participant is put in a position where they are not personally at risk of having to repay the loan in full.
Financing features that may call into question the potential application of an anti-avoidance tax law include:
- mechanisms to reduce or eliminate the borrower's liabilities to the lender, whether or not legally enforceable
- if repayment of principal and payment of interest is linked to deriving income from the scheme
- 'round-robin' transactions, or equivalent, that do not appear to provide the responsible entity with sufficient funds to be able to carry out its obligations.
It is not sufficient to assert that an arm's-length financier is being used. It is possible to arrange limited-recourse financing from an arm's-length provider by the use of significant security deposits, or other back-to-back arrangements. We will generally need to be satisfied that no such elements are present before we will issue a product ruling.
Financing principles
Related-party financiers
A related-party financier is a financier that is an associate of any of the principal entities taking part in the scheme. This includes financiers associated with the responsible entity, the manager, and the landowner or lessor of the land. A product ruling will issue if loans offered by such financiers are consistent with all of the following financing principles:
- Loans do not include any interest-only period.
- Loans have a repayment term not exceeding 80% of the term of the scheme or 15 years, whichever is the lesser (for example, the term of the loan cannot exceed 8 years for a 10-year scheme and cannot exceed 15 years for a 25-year scheme).
- Loans offered by related-party financiers will be repaid over the term of the loan in equal monthly principal and interest repayments.
- The terms and conditions of the loan, including the interest rate, must be commercially comparable to loans being offered by arm's-length lenders in the market.
Note: If a primary production scheme is being promoted by a bank or financial institution, loans offered to participants in that scheme by that bank or financial institution will also be reviewed to determine if they are consistent with the above principles and, if not, will be subject to a comprehensive consideration of finance terms.
Preferred financiers
A preferred financier is a financier that has entered into a formal or informal arrangement with any entity associated with the scheme, where the financier agrees to consider applications for loans from persons wishing to invest in the scheme.
For a product ruling to be issued, any loans offered by preferred financiers to participants in the scheme must be offered on the same terms as set out above for related-party financiers, noting the following variations, given that loans provided by a preferred financier present a lesser risk that Part IVA may apply
where a preferred financier is offering a relatively short interest-only period within the term of the loan:
- The interest-only period can be 20% of the term of the scheme, up to a maximum of 3 years.
- The loan term must not exceed 80% of the term of the scheme.
In effect, for a 10-year scheme, the loan term can be no more than 8 years, including an interest-only period of 2 years or less, followed by equal periodic repayments of principal and interest, and based on normal commercial terms.
External financiers
An external financier is a financier that is not a related-party financier or a preferred financier, as described above.
A finance arrangement entered into between a participant in a scheme and an external financier will not be covered by a product ruling. If a participant is able to negotiate a loan with an external financier on more favourable terms than those offered by a related-party financier or a preferred financier, that is a matter between the participant and the external financier. Taxpayers who want certainty on the tax benefits available from such arrangements should apply for a private ruling.
Terms payments
Terms payment finance arrangements, in the context of schemes, are typically for a shorter period and are interest-free.
Where the participant is offered an option to pay the initial-period fees to the manager under a terms payment finance arrangement, a product ruling will only issue where those fees are paid in full to the manager within 12 months of the participant entering the scheme. This recognises 3 things:
- Under a terms payment finance arrangement, the manager has not received funds from a financier on behalf of a borrower.
- The fees charged by the manager are for services to be provided in the initial period.
- The finance arrangement ensures the manager has sufficient funds to carry out the services it has contracted to provide.
These guidelines assist promoters to structure their scheme so that we may provide a product ruling. If a terms payment finance arrangement does not satisfy the guidelines, a product ruling will not issue and participants wishing certainty on the tax benefits of the scheme will need to apply for a private ruling.
12-month interest-free loans
A 12-month interest-free loan, from a related-party financier or a preferred financier, is similar to a terms payment arrangement. A 12-month interest-free loan differs from a terms payment arrangement in that the manager is put 'in funds' by a financier on behalf of a borrower.
If a participant is offered a 12-month interest-free loan from a related party financier or a preferred financier, a product ruling will only issue if the loan is to be repaid in full by the participant within 12 months. The funds to repay the loan cannot be obtained from any further manager loans. This is to ensure that the manager has access to funds to conduct the required activities.
Acceptance of applications subject to finance
Some schemes have proposed to accept applications subject to the approval of finance. In such cases, the scheme manager proposes to execute scheme agreements and allot identifiable interests to participants on the closing date for applications. The agreements will be expressed to be subject to the provision of finance from third parties.
Where such applications are expressed as being subject to the provision of finance, there will be doubt as to whether there is an existing liability at 30 June, and whether it can be said that the participant has incurred the outgoings subject to finance. See Taxation Ruling TR 97/7 Income tax: section 8-1 – meaning of 'incurred' – timing of deductions.
Financing arrangements may result in the full amount of subscription monies not being immediately available to fund the scheme. If a financing arrangement has been examined and is acceptable to us based on the circumstances of that particular scheme, that arrangement will be described in the product ruling.
Accordingly, where applications are accepted but subscription monies are not paid in full by 30 June, except under an arrangement approved by us and described in the 'Scheme' section of a product ruling, we will exclude those participants from the class of entities to whom the ruling applies. This is because it is not possible to conclude with sufficient certainty, that the application of the tax law for those participants will be identical to the application of the tax law for those participants who pay subscription monies in full by 30 June.
We may visit the offices of promoters following the end of the income year to confirm that applications have been accepted and agreements have been executed in accordance with the 'Scheme' section of the product ruling and the relevant scheme agreements.