ATO Interpretative Decision

ATO ID 2001/315 (Withdrawn)

Income Tax

Transfer Pricing
FOI status: may be released

This ATO ID is withdrawn because it contains a view in respect of a provision of the Income Tax Assessment Act 1936 that does not apply after 29 June 2013. Despite its withdrawal, this ATO ID continues to be a precedential ATO view in respect of decisions up to, and including 29 June 2013.

This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

CAUTION: This is an edited and summarised record of a Tax Office decision. This record is not published as a form of advice. It is being made available for your inspection to meet FOI requirements, because it may be used by an officer in making another decision.

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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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

Whether in terms of subsections 136AD(1) or (2) of the Income Tax Assessment Act 1936 (ITAA 1936) the company has supplied "property" under an international loan agreement(s) for less than arm's length consideration, or no consideration.

Decision

Conditions operate between the related parties in their commercial or financial relations which differ from those which might be expected to operate between independent companies dealing wholly independently with one another. The threshold conditions for the application of Division 13 of the ITAA 1936 have also been satisfied. Consequently amounts of deemed income should be imputed to the resident lender.

Facts

1.: A loan was made from a resident group company to a Dutch subsidiary of the group. The loan was evidenced by a written agreement.
2.: Funds were initially used directly and indirectly for the purposes of exploration and production.
3.: The loan was not subordinated.
4.: Subsequent amounts were loaned and used for the purpose of acquiring shares in an overseas public company.
5.: Interest was calculated and accrued in the Netherlands under the terms of the original loan agreement. Apart from one initial payment no interest was actually paid to the resident lender.
6.: Tax deductions were claimed for this accrued interest in the Netherlands.
7.: Large repayments of loan capital have occurred.
8.: The loan was repaid.

Reasons for Decision

Application of Subsections 136AD(1) & (2) of the ITAA 1936

On the evidence available and in accordance with the guidelines contained in Taxation Ruling TR 92/11, the majority of the loans/advances of money should not be accepted as quasi-equity. In particular it is not accepted that investing in a public company constitutes the exploration stage of a mining business as used as an example at paragraph 60(g) of Taxation Ruling TR 92/11. Additionally the overall picture that emerges from these transactions is that of a loan. The taxpayer has not established that the transactions that bear the legal character of a loan are equivalent to a contribution to equity, see paragraph 61 of Taxation Ruling TR 92/11.

In keeping with the legislative purpose of Division 13 of the ITAA 1936, it could be expected that the Commissioner's discretion would normally be exercised to attribute income to a resident company if a non-arms length agreement has resulted in a shifting of income from Australia, regardless of the motive or purpose of the agreement: para 92 of Taxation Ruling TR 92/11 and para 117 of Taxation Ruling TR 94/14.

Article 9 of the Netherlands Agreement of the International Tax Agreements Act 1953 (Netherlands Agreement)

Since the Dutch company is a wholly owned subsidiary of the resident company which is a wholly owned subsidiary of the Australian parent then Article 9(1)(a) of the Netherlands Agreement will apply. 'Article 9(1) [participation in management, control or capital]

Where-

(a)
an enterprise of one of the States participates directly or indirectly in the management, control or capital of an enterprise of the other state
and in either case conditions operate between the two enterprises in their commercial or financial relations which differ from those which might be expected to operate between independent enterprises dealing wholly independently with one another, then any profits which, but for those conditions, might have been expected to accrue to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly'.

This article is essentially the same as the dealing at arm's length test in Division 13 of the ITAA 1936. The lender is not dealing at arm's length with the borrower. In line with Taxation Ruling TR 97/20 it is considered that the determination should be made using Division 13 of the ITAA 1936 as the alternative basis. Application of Section 136AD(4) of the ITAA 1936

'For the purposes of this section, where, for any reason (including an insufficiency of information available to the Commissioner), it is not possible or not practicable for the Commissioner to ascertain the arm's length consideration in respect of the supply or acquisition of property, the arm's length consideration in respect of the supply or acquisition shall be deemed to be such amount as the Commissioner determines'

It has not been possible to obtain a highly reliable comparable against which to establish the arm's length consideration. Nevertheless, the rate used by the parties in the earlier dealings is accepted as being reasonable in the circumstances and also appropriate to use for the purposes of this adjustment.

Date of decision: 6 July 2001

Year of income: Year ended 30 June 1990 to year ended 31 December 1997

Legislative References:
Income Tax Assessment Act 1936
   Subsection 25(1)
   Subsection 136AD(1)
   Subsection 136AD(2)
   Subsection 136AD(4)

International Tax Agreements Act 1953
   Schedule 10
   Schedule 10 Article 9
   Schedule 10 Article 9(1)
   Schedule 10 Article 9(1)(a)

Related Public Rulings (including Determinations)
TR 92/11
TR 94/14
TR 97/20

Keywords
Transfer pricing
International loans

Business Line: Public Groups and International

Date of publication: 12 September 2001

ISSN: 1445-2782

history

	Date:	Version:
	6 July 2001	Original statement
You are here	12 December 2014	Archived

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