Income Tax Assessment Act 1997
A *scheme gives rise to a debt interest in an entity if the scheme, when it comes into existence, satisfies the debt test in subsection 974-20(1) in relation to the entity.
A debt interest can also arise under subsection (2) (related schemes) or section 974-65 (Commissioner's discretion).
Section 974-55 defines various aspects of the debt interest that arises.Related schemes giving rise to debt interest 974-15(2)
Two or more *related schemes (the constituent schemes ) together give rise to a debt interest in an entity if:
(a) the entity enters into, participates in or causes another entity to enter into or participate in the constituent schemes; and
(b) a scheme with the combined effect or operation of the constituent schemes (the notional scheme ) would satisfy the debt test in subsection 974-20(1) in relation to the entity if the notional scheme came into existence when the last of the constituent schemes came into existence; and
(c) it is reasonable to conclude that the entity intended, or knew that a party to the scheme or one of the schemes intended, the combined economic effects of the constituent schemes to be the same as, or similar to, the economic effects of a debt interest.
This is so whether or not the constituent schemes come into existence at the same time and even if none of the constituent schemes would individually give rise to that or any other *debt interest.
Section 974-105 explains the effect, for tax purposes, of actions taken under the schemes.974-15(3)
Subsection (2) does not apply if each of the *schemes individually gives rise to a *debt interest in the entity. 974-15(4)
Two or more *related schemes do not give rise to a debt interest in an entity under subsection (2) if the Commissioner determines that it would be unreasonable to apply that subsection to those schemes. 974-15(5)
Without limiting subsection 974-10(5) , the Commissioner must, in exercising the power to make a determination under subsection (4), have regard to the following:
(a) the purpose of the *schemes (considered both individually and in combination);
(b) the effects of the schemes (considered both individually and in combination);
(c) the rights and obligations of the parties to the schemes (considered both individually and in combination);
(d) whether the schemes (when considered either individually or in combination) provide the basis for, or underpin, an interest issued to investors with the expectation that the interest can be assigned to other investors;
(e) whether the schemes (when considered either individually or in combination) comprise a set of rights and obligations issued to investors with the expectation that it can be assigned to other investors;
(f) any other relevant circumstances. 974-15(6)
(a) 2 or more *related schemes give rise to a *debt interest in an entity; and
(b) one or more of those schemes (the hedging scheme or schemes ) are schemes for hedging or managing financial risk; and
(c) the other scheme or schemes give rise to a debt interest in the entity even if the hedging scheme or schemes are disregarded;
the debt interest that arises from the schemes is taken, for the purposes of Division 820 (the thin capitalisation rules), not to include the hedging scheme or schemes.
This means that in these circumstances the losses associated with the hedging scheme or schemes are not debt deductions under section 820-40 .