Question 19 Debt interests and equity interests
Question 19 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 question 19:
- Identify all debt and equity interests you had on issue or which you held during 2023–24 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 4).
- 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.
Print X in the Yes box at question 19 – label A, if you had financing arrangements to which this question applies.
If you answer Yes at question 19 – label A, complete the following:
- At label B, write the average quarterly balance of debt interests issued (finance received).
- At label C, write the average quarterly balance of debt interests held (finance provided).
- At label D, write the average quarterly balance of equity interests issued (finance received).
- At label E, write the average quarterly balance of equity interests held (finance provided).
For help working out the tax characterisation of an interest as debt or equity (debt and equity tests), see:
- Division 974 of the ITAA 1997
- Guide to the debt and equity tests
- Debt and equity tests: guide to 'at call' loans.
Example 18: debt interests and equity interests
Bob & Co analyses the financial arrangements they had during the income year that were entered into with international related parties where the debt and equity treatment under Division 974 of the ITAA 1997 is different from the debt and equity treatment for accounting purposes.
Bob & Co identifies the following information in the table.
|
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 – received |
Average quarterly balances Div 974 treats as debt – provided |
Average quarterly balances Div 974 treats as equity – received |
Average quarterly balances Div 974 treats as equity – provided |
|---|---|---|---|---|
|
Redeemable preference shares |
N/A |
N/A |
31,750,000 |
N/A |
|
Convertible notes |
16,800,000 |
N/A |
N/A |
N/A |
|
Perpetual notes |
N/A |
26,750,000 |
N/A |
N/A |
|
Stapled security |
N/A |
N/A |
23,125,000 |
N/A |
|
Total |
16,800,000 |
26,750,000 |
54,875,000 |
0 |
With this information, Bob & Co complete question 19 as follows:
Question 19a Financial arrangements
Financial arrangements under taxation of financial arrangements rules
Question 19a helps us to identify the quantum of financial arrangements that fall under taxation of financial arrangements (TOFA) rules contained in Division 230 of ITAA 1997 and give rise to TOFA gains or TOFA losses under Division 230, that is not also a debt interest under Division 974.
If you had a financial arrangement for the purpose of Division = 230 that gave rise to TOFA gains or TOFA losses under Division 230, and that financial arrangement is not a debt interest under Division 974:
- Print X in Yes box at question 19a – label A and complete the required fields.
- Specify at question 19a – label B, the total value of all Division 230 financial arrangements that gave rise to TOFA gains or TOFA losses under Division 230 but are not debt interests under Division 974, excluding ordinary shares.
The total TOFA value of the financial arrangements asked for in this question is based on your accounting records.
The TOFA value of the financial arrangements must not be netted off against each other. Hence, financial arrangements that are ‘assets’ of $16 million and financial arrangements that are ‘liabilities’ of $12 million add up to a total TOFA value of $28 million, not $4 million.
If you answer Yes at question 19a – label A, complete the following:
- At label C, include the total value of any TOFA gains recognised in relation to the amount of financial arrangements specified at question 19a – label B, excluding ordinary shares.
- At label D, include the total value of any TOFA losses recognised in relation to the amount of financial arrangements specified at question 19a – label B, excluding ordinary shares.
Ordinary shares are shares issued by a company carrying proportionate rights to voting and to profit and capital distributions, and carrying no special rights.
Question 20 Taxation of financial arrangements rules
Taxation of financial arrangements rules and tax timing method elections
Question 20 aims to identify if you are subject to taxation of financial arrangements (TOFA) rules contained in Division 230 of ITAA 1997. Understanding whether you are subject to the TOFA rules and the tax timing method elections you have made will provide us with the context to understand the information you report regarding your financial arrangements.
The TOFA rules will apply to you if your aggregated turnover, financial assets or assets exceed relevant thresholds or you have otherwise made an election for the TOFA rules to apply.
Print X in Yes box at question 20 – label A, if you are subject to the TOFA rules contained in Division 230 of the ITAA 1997 and complete the required fields.
If you answer Yes, you must specify which (if any) of the tax timing method elections you have made to assess your gains and losses from financial arrangements, at question 20 – labels B to F.
If no election was made, you should complete label G. These tax timing method elections are contained in subdivisions 230-C to 230-F of the ITAA 1997.
For help working out if Division 230 of the ITAA 1997 applies to you and the relevant threshold tests, see:
- Stages 3 and 4: TOFA in Guide to the taxation of financial arrangements
- section 230-455 of the ITAA 1997.
Example 19: taxation of financial arrangements
ABC Co is an authorised deposit taking institution and the TOFA rules apply to all of its financial arrangements entered into on or after 1 July 2010.
ABC Co has made elections in accordance with Division 230 of the ITAA 1997 to apply the fair value method and the foreign exchange retranslation method – general election.
With this information, ABC Co would complete question 20 as follows:
Continue to: Section C: Interests in foreign entities
Return to: Instructions to complete the international dealings schedule