Thin capitalisation
The debt test is also used to identify which financing arrangements constitute debt for thin capitalisation purposes. Amounts outstanding on debt interests issued by an entity that are still on issue will constitute 'debt capital' under the thin capitalisation rules. Broadly, if the thin capitalisation rules apply, an entity is required to calculate its debt capital and compare it to its maximum allowable debt. If the entity's debt capital is more than its maximum allowable debt the entity's debt deductions may be denied to that extent. Therefore, it is important for thin capitalisation purposes to identify whether an interest is a debt interest.
Further, it is also necessary for thin capitalisation purposes to identify whether an interest which an entity holds in another entity is an equity interest. In addition to the equity interest rules discussed above, special rules are included in the thin capitalisation law which determine whether an interest is an equity interest in a partnership or trust.
Withholding tax for non-residents
The debt/equity rules will apply to Division 11A of Part III of the Income Tax Assessment Act 1936 except where the sections relate to levels of ownership. Therefore, apart from these sections, the Division will apply to a non-share dividend in the same way as it applies to a dividend.
Division 11A imposes a withholding tax on Australian sourced dividends, interest and royalties paid to non–residents. For the purpose of determining the boundary between interest and dividend withholding tax, interest withholding tax may apply to a non-equity share rather than dividend withholding tax. To the extent to which an amount is a return on an equity interest, interest withholding tax will not apply.
Public trading trusts and corporate unit trusts
Certain unit trusts are taxed in an equivalent way to companies. There are public trading trusts and corporate unit trusts identified in Division 6C of Part III of the Income Tax Assessment Act 1936. The new debt/equity rules will apply in relation to these trusts in an equivalent way to how they apply to companies.