ATO Interpretative Decision

ATO ID 2010/167 (Withdrawn)

Income Tax

• This ATO ID is withdrawn as it is superseded by Taxation Ruling TR 2012/4
  This document incorporates revisions made since original publication. View its history and amending notices, if applicable.

Issue

Will the rights and obligations under a loan facility agreement form a single arrangement under subsection 230-55(4) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision

No. The rights and obligations that arise upon the making of a draw down under the loan facility agreement will constitute a separate arrangement(s) for the purposes of subsection 230-55(4) of the ITAA 1997.

Facts

A company (the borrower) enters into a loan facility agreement with an arms length party (the lender) on 1 June 2010. The borrower requires the funds solely for the purpose of carrying on its normal operating activities.

The borrower is an Australian resident for tax purposes.

The lender will commit to advance funds up to a maximum aggregate amount agreed between the parties, provided certain pre-requisites are met. These include the completion and service by the borrower to the lender of a valid notice of draw down stating, amongst other things, the amount to be drawn down.

The borrower is nevertheless not obliged to draw down any amount under the facility arrangement. The borrower will request funds from time to time as required for its business operations.

The borrower will pay a commercial rate of interest which is applied to each draw down and all other amounts outstanding under the facility arrangement. Interest is calculated on a daily basis, compounding semi-annually and due and payable in arrears on 30 June and 31 December each year.

The facility agreement terminates on 30 June 2020 and outstanding draw downs are to be repaid on this date.

Division 230 of the ITAA 1997 applies to the borrower from 1 July 2010 as the borrower has not elected to apply Division 230 of the ITAA to its financial arrangements from 1 July 2009. The borrower has also not elected to use any of the elective tax timing methods under Division 230 of the ITAA.

Reasons for Decision

All legislative references are to the ITAA 1997 unless otherwise indicated.

Division 230 identifies a 'financial arrangement' as the unit of taxation in respect of which gains and losses are recognised under Division 230. Before it can be decided whether the tests for a 'financial arrangement' have been met, the particular arrangement being tested must be determined.

The arrangement is identified having regard to a range of factors in order to objectively determine whether an arrangement comprises certain additional rights and obligations, outside of the terms of the contractual agreement, or is limited to only some of those rights and obligations (refer to subsection 230-55(4)).

Subsection 230-55(4) states that whether a number of rights and/or obligations are themselves an arrangement or are two or more separate arrangements is a question of fact and degree that you determine having regard to the following:

(a)

the nature of the rights and obligations

(b)

their terms and conditions (including those relating to any payment, or other consideration for them)

(c)

the circumstances surrounding their creation and their proposed exercise or performance (including what can reasonably be seen as the purposes of one or more of the entities involved)

(d)

whether they can be dealt with separately or must be dealt with together

(e)

normal commercial understandings and practices in relation to them (including whether they are regarded commercially as separate things or as a group or series that forms a whole)

(f)

the objects of Division 230.

When a draw down is made under the loan facility agreement, the borrower will have the following rights and obligations:

1.

a right to receive the funds

2.

an obligation to repay the funds advanced

3.

an obligation to provide interest on the funds received.

It is considered that the rights and obligations arising under each draw down constitute separate arrangements for the purposes of subsection 230-55(4) as:

1.

generally, the nature of a facility agreement is that it provides for the coming into existence of certain rights and obligations when a draw down is made

2.

the terms and conditions of the facility agreement indicate that the relevant rights and obligations are those recognised upon the draw down of funds. The facility agreement is no more, in substance, than a pre-arranged opportunity to borrow funds at particular rates if so desired. In these circumstances, the draw downs would generally be seen to be separate arrangements (in contrast to facility arrangements which evidence a 'continuity of obligation', refer to K.D. Morris & Sons Pty Ltd (in liquidation) v. Bank of Queensland Ltd (1980) 146 CLR 165 at 173 and 174).

3.

the circumstances surrounding the creation and performance of the rights and obligations indicate that the loan facility agreement was entered into to fund the normal business activities of the borrower and that the borrower will make ad hoc requests for draw downs, from time to time, as and when required. The relevant arrangement is constituted by the rights and obligations that arise when a valid request for a draw down is made and funds are advanced pursuant to that request, that is, it is the request for funds, and subsequent advance of funds, that give rise to the immediate and enforceable right to receive those funds and obligation to repay those funds and provide interest.

4.

commercially, and for accounting purposes, the entry into a loan facility agreement is considered to be a loan commitment which is not recognised at inception. It is only when draw downs are made that resulting assets and liabilities are recognised i.e. it is what is done from time to time under the loan facility agreement and not the loan facility agreement itself which gives rise to the enforceable rights and obligations of the parties (refer to K.D. Morris & Sons Pty Ltd (in liquidation) v. Bank of Queensland Ltd (1980) 146 CLR 165 at 202).

5.

a closer alignment with the objects of Division 230 is achieved when, as on the facts of this case, the draw downs are recognised as separate arrangements (refer to section 230-10).

Accordingly, each draw down made under the loan facility agreement will itself constitute an arrangement for the purposes of subsection 230-55(4).

Whether or not the arrangement is a financial arrangement will depend upon whether it satisfies the definition of a 'financial arrangement.'

Year of income:  Year ended 30 June 2011

Legislative References:
Income Tax Assessment Act 1997
   Division 230
   section 230-10
   subsection 230-55(4)

Case References:
K.D. Morris & Sons Pty Ltd (in liquidation) v. Bank of Queensland Ltd
   (1980) 146 CLR 165

Related ATO Interpretative Decisions
ATO ID 2009/115
ATO ID 2010/134

Keywords
Arrangement
Facility agreements
Taxation of Financial Arrangements CoE

Business Line:  Finance and Investment Centre of Expertise

Date of publication:  24 September 2010

ISSN: 1445-2782