ATO Interpretative Decision
ATO ID 2003/326
Income Tax
Equity interests in companiesFOI status: may be released
This ATOID provides you with the following level of protection:
If you reasonably apply this decision in good faith to your own circumstances (which are not materially different from those described in the decision), and the decision is later found to be incorrect you will not be liable to pay any penalty or interest. However, you will be required to pay any underpaid tax (or repay any over-claimed credit, grant or benefit), provided the time limits under the law allow it. If you do intend to apply this decision to your own circumstances, you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed. You may wish to obtain further advice from the Tax Office or from a professional adviser.
Issue
In the absence of subsection 974-70(2) of the Income Tax Assessment Act 1997 (ITAA 1997) applying, can units in a trust, which is not taxed as a company under either Division 6B or Division 6C of the Income Tax Assessment Act 1936 (ITAA 1936), be characterised as an equity interest?
Decision
No. In the absence of subsection 974-70(2) of the ITAA 1997 applying, units in a trust, which is not taxed as a company under either Division 6B or Division 6C of the ITAA 1936 cannot be characterised as an equity interest.
Facts
Trust 1 raises funds by issuing units to investors. Trust 1 uses these funds to acquire units in Trust 2. The units entitle Trust 1 to all of the income and capital of Trust 2 except in certain exceptional circumstances.
Trust 2 uses these funds to subscribe for a non-share equity interest issued by Y.
Trust 1 and Trust 2 are not taxed as companies under either Division 6B or Division 6C of the ITAA 1936. The interests are not treated as giving rise to an equity interest in a company under subsection 974-70(2) of the ITAA 1997.
Reasons for Decision
The use of the term 'equity interest' in Subdivision 974-C of the ITAA 1997 is qualified in that it must be an equity interest in a company.
As the units in Trust 1 and Trust 2 are not interests in a company these units will not give rise to an equity interest as defined by sections 974-75 or 974-80 of the ITAA 1997.
Date of decision: 30 April 2003Year of income: Year ended 30 June 2003
Legislative References:
Income Tax Assessment Act 1936
Division 6B
Division 6C
subdivision 974-C
subsection 974-70(2)
section 974-75
section 974-80
Keywords
Debt equity borderline
ISSN: 1445-2782