ATO Interpretative Decision
ATO ID 2004/430
Income Tax
Debt/Equity: related schemeFOI status: may be released
Status of this decision: Decision Current
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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you will need to ensure that the relevant provisions referred to in the decision have not been amended or repealed.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
Will the issue of loan notes and shares that must be subscribed to together, but can subsequently be dealt with separately, be treated as related schemes under section 974-155 of the Income Tax Assessment Act 1997 (ITAA 1997)?
Decision
Yes. The loan notes and shares will be treated as related schemes because they satisfy the definition of a related scheme as contained in section 974-155 of the ITAA 1997.
Facts
A company intends raising funds to finance its investments via the issue of two different types of securities: ordinary shares and loan notes.
The shares and loan notes will be issued under the one agreement. An investor subscribing to the company will be required to acquire both the shares and loan notes.
The shares and loan notes may be dealt with independently of each other by the investors after they have been acquired from the company.
Reasons for Decision
Section 974-155 of the ITAA 1997 sets out the circumstances in which two or more schemes are to be treated as related schemes for the purposes of Division 974 of the ITAA 1997.
In the present case, the loan notes and the shares each constitute a scheme as defined in subsection 995-1(1) of the ITAA 1997. The loan notes and shares will satisfy the broad definition of a related scheme (subsection 974-155(1) of the ITAA 1997).
Subsection 974-155(1) of the ITAA 1997 provides that 'subject to subsection (3), 2 schemes are related to one another if they are related to one another in any way'. This is qualified by subsection 974-155(3) of the ITAA 1997 which states that two schemes are not related to one another 'merely because: (a) one refers to the other; or (b) they have a common party'. In the arrangement in question, there is a relationship between the shares and the loan notes - a subscriber to the investment must purchase both the shares and the loan notes. This is a relationship that extends beyond one scheme merely referring to the other, or a relationship simply being due to the existence of a common party.
Notwithstanding that the shares and loan notes give rise to a related scheme pursuant to the operation of subsection 974-155(1) of the ITAA 1997, whether the related schemes give rise to a debt interest or an equity interest as defined in Division 974 of the ITAA 1997 will be determined by the operation of the other relevant provisions within that Division.
Date of decision: 14 May 2004Year of income: Year ended 30 June 2002 Year ended 20 June 2003 Year ended 20 June 2004 Year ended 20 June 2005 Year ended 20 June 2006 Year ended 20 June 2007
Legislative References:
Income Tax Assessment Act 1997
subsection 995-1(1)
section 974-155
ATO ID 2003/870
Keywords
Debt/equity borderline
ISSN: 1445-2782
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