INCOME TAX ASSESSMENT ACT 1997

CHAPTER 4 - INTERNATIONAL ASPECTS OF INCOME TAX  

PART 4-5 - GENERAL  

Division 820 - Thin capitalisation rules  

Subdivision 820-K - Zero-capital amount  

SECTION 820-942   How to work out the zero-capital amount  

820-942(1)  


An entity ' s zero-capital amount at a particular time is the result of the method statement in this subsection. Method statement

Step 1.

Work out the total value, as at that particular time, of all the assets of the entity that represent *debt interests that:

  • (a) are of a kind commonly dealt in by entities that carry on a *business of dealing in securities; and
  • (b) the entity has sold under a reciprocal purchase agreement (otherwise known as a repurchase agreement), sell-buyback arrangement or securities loan arrangement; and
  • (c) the entity has not yet repurchased under the agreement or arrangement.

  • Step 2.

    Add to the result of step 1 the total value, as at that time, of all the *debt interests issued to the entity to which the following paragraphs apply at that time:

  • (a) the debt interests remain *on issue;
  • (b) each of the debt interests is a loan of money for which no fees, charges or other consideration for the purpose of enhancing the credit rating of the issuer of the interest has been paid or is payable to the entity, any of the entity ' s *associates or another entity that is a *foreign entity;
  • (c) each of the entities issuing the interests has the required credit rating for the interests concerned in accordance with subsections (4) and (5).

  • Step 3.

    Add to the result of step 2 the total value, as at that time, of all the *debt interests that are assets of the entity (whether they are debt interests issued to the entity or not) and to which the following paragraphs apply at that time:

  • (a) the risk weight of each of the debt interests is either 0% or 20% under the *prudential standards;
  • (b) the debt interests do not satisfy all of the paragraphs in step 2.

  • Step 3A.

    Add to the result of step 3 the total value, as at that time, of all the assets of the entity, to the extent that they:

  • (a) consist of rights to the return of assets covered by subsection (2A); and
  • (b) are covered by none of the steps 1, 2 and 3.

  • Step 4.

    Add to the result of step 3A the total value, as at that time, of all the *securitised assets that the entity has at that time if the entity is a *securitisation vehicle at that time (see subsections (2) and (3)). The result is the zero-capital amount .

    820-942(2A)  


    This subsection covers an asset that:


    (a) the entity provided as security for the performance of its obligations in relation to securities it acquired under a reciprocal purchase agreement (otherwise known as a repurchase agreement), sell-buyback arrangement or securities loan arrangement; and


    (b) does not consist of *shares.

    Securitisation vehicle

    820-942(2)  
    An entity is a securitisation vehicle if:


    (a) it is an entity established for the purposes of acquiring, funding and holding *securitised assets (see subsection (3)); and


    (b) it has acquired the securitised assets from another entity (the originator ); and


    (c) the acquisition of the securitised assets is wholly funded by the issuing of *debt interests by the entity; and


    (d) in issuing the debt interests, the entity does not receive any guarantee, security or other form of credit support from any of its *associate entities, the originator or any associate entity of the originator; and


    (e) the entity has not issued debt interests for any purpose other than for the purpose of funding the acquisition of the securitised assets; and


    (f) there are no debt interests issued to the entity by any of the entity ' s associate entities, the originator or any associate entity of the originator; and


    (g) any *arrangements the entity has with any of its associate entities, the originator or any associate entity of the originator are those that would reasonably be expected to have been entered into by parties dealing at *arm ' s length with each other.

    Note:

    An entity that does not qualify as a securitisation vehicle may be exempt from the thin capitalisation rules under section 820-39 .

    Securitised assets

    820-942(3)  
    An asset of an entity is a securitised asset if:


    (a) the entity is a *securitisation vehicle; and


    (b) the asset consists of:


    (i) *debt interests issued by an entity other than the originator in relation to the securitisation vehicle that is mentioned in paragraph (2)(b); or

    (ii) a lease for the hire of goods that would be a lease covered by paragraph (b) of the definition of on-lent amount if a reference to an entity in that definition were a reference to that originator; or

    (iii) a *scheme that, apart from the operation of paragraph 974-25(1)(b) , would have given rise to a debt interest covered by subparagraph (i); and


    (c) the asset provides security for the issuing of debt interests that funded the acquisition of the asset by the securitisation vehicle (see paragraph (2)(c)). What is the required credit rating?

    820-942(4)  
    For the purposes of step 2 of the method statement in subsection (1), the required credit rating for an entity issuing a *debt interest is:


    (a) if the interest is a *subordinated debt interest - a long-term foreign currency corporate credit rating of at least A (or equivalent) given to the entity by an internationally recognised rating agency; or


    (b) if the interest is not a subordinated debt interest - a long-term foreign currency corporate credit rating of at least BBB (or equivalent) given to the entity by an internationally recognised rating agency. When must an entity have the required credit rating

    820-942(5)  
    The entity must have the required credit rating as specified in any of the following paragraphs:


    (a) the entity had the required credit rating for the *debt interest when the interest was issued;


    (b) the following subparagraphs apply:


    (i) the entity did not have any long-term foreign currency corporate credit rating given to it by an internationally recognised rating agency when the debt interest was issued; but

    (ii) the entity had the required credit rating for that interest at any time during the period of 6 months immediately before the interest was issued;


    (c) the following subparagraphs apply:


    (i) when the debt interest was issued, and throughout the period of 6 months immediately before the interest was issued, the entity did not have any long-term foreign currency corporate credit rating given to it by an internationally recognised rating agency; but

    (ii) the entity has the required credit rating for that interest at any time during the period of 6 months immediately after the interest was issued.

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