Edited version of private advice

Authorisation Number: 1051778377220

Date of advice: 16 December 2020

Ruling

Subject: Taxation of financial arrangements tax treatment of a syndicated facility arrangement

Question 1

Will Facility A, Facility B and the Revolving Facility made available under the Syndicated Facility Agreement together be considered a single arrangement pursuant to subsection 230-55(4) of the Income Tax Assessment Act 1997?

Answer

No

Question 2

Will Facility A of the Syndicated Facility constitute a financial arrangement for the purposes of section 230-45 of the Income Tax Assessment Act 1997?

Answer

Yes

Question 3

On the syndication of the Syndicated Facility in September 20xx (and specific to Facility A), did Head Co make an assessable gain or a deductible loss pursuant to section 230-15 of the Income Tax Assessment Act 1997 during the income year ended 31 December 20xx when the Original Lender novated part of its lending commitment as a result of the variations in the USD to AUD exchange rate?

Answer

Yes

Question 4

When the Syndicated Facility was refinanced in December 20xy (and specific to Facility A) did Head Co make an assessable gain or a deductible loss pursuant to section 230-15 of the Income Tax Assessment Act 1997 during the income year ended 31 December 20xy, when the Leaving Lenders novated all or part of its lending commitments as a result of variations in the USD to AUD exchange rates?

Answer

Yes.

This ruling applies for the following period(s)

The income tax year ended 31 December 20xx

The income tax year ended 31 December 20xy

The scheme commences on

xx June 20xx

Relevant facts and circumstances

Head Co is the head company of the Head Co Tax Consolidated Group (Head Co Group).

The Head Co Group is subject to Division 230 of the Income Tax Assessment Act 1997 (ITAA 1997) and has not made any elections in respect of the tax-timing methods under Division 230.

The Syndicated Facility

In June 20xx, Head Co's subsidiary, Fin Co, entered into a syndicated facility (Syndicated Facility) with the lenders.

Fin Co is a subsidiary member of the Head Co Group.

The purpose of the Syndicated Facility was to ensure Fin Co's existing loan facility could be refinanced before it needed to be reported as a current liability. The existing loan facility (Existing Loan) was used to finance the acquisition of Op Co.

The syndicated facility is governed by the Syndicated Facility Agreement (SFA).

The SFA

Under the SFA, three facilities were made available to Fin Co (together, "the Facilities"):

•              Facility A denominated in USD

•              Facility B denominated in AUD, and

•              Revolving Facility denominated in multi-currency.

The lenders made available an amount in respect of Facility A, Facility B and the Revolving Facility.

The obligations of each lender under the SFA are several.

The rights of each lender under or in connection with the SFA are separate and independent and any debt arising under the SFA to a lender from a borrower is a separate and independent debt.

Purpose

Facility A and Facility B were to be used within the Head Co Group to refinance the Existing Loan and fund any associated refinancing costs.

The Revolving Facility provided working capital to the group and was also used for other general corporate purposes.

Utilisation of the facilities

The Facilities may be drawn upon by way of delivery of a utilisation request.

The utilisation request must identify, amongst other things, the facility to be drawn upon, the currency and amount of that Loan, as well as the borrower.

There are minimum amounts for each utilisation request depending on the facility.

The amount of any lenders' participation in each loan under any facility will be equal to a proportion of that loan, which proportion is equal to that borne by its available commitment (in respect of such facility) to the available facility (in respect of such facility), immediately prior to making of that loan.

Repayment

The principal of Facility A and Facility B must be repaid in full on the termination date, which is the earlier of:

•           36 months after the first drawdown, or

•           if existing notes are not refinanced or replaced in full, one month prior to the maturity of existing notes.

The Revolving Facility Loan is to be paid in full on the last day of its interest period.

Refinancing

The SFA provides a mechanism that enables an effective payment by direction when one, or all, of the Facilities are refinanced. That is, in the event one, or all, of the facilities was refinanced by a new loan or lender, the refinanced amount can be treated as if it were applied against the repayment of the existing loan balances.

Voluntary prepayment

The SFA allows Fin Co to voluntarily prepay the whole or any part of any of the Facilities.

Interest

The interest rate for each loan under each of the Facilities for each interest period is:

•              Facility A: The sum of a 2% margin and LIBOR

•              Facility B: The sum of a 2% margin and BBSY Bid, and

•              Revolving Facility: The sum of a 2% margin and LIBOR.

Interest must be paid on each loan borrowed on the last day of each interest period (and, if the interest period is longer than six months, on the dates falling at six monthly intervals after the first day of that interest period).

The borrower can select an interest period for a loan in a utilisation request or in a selection notice, otherwise a default interest period of one month will apply to the loan. The interest period can be one, three or six months or any other period.

The Revolving Facility has one interest period only.

Changes to the Lenders

A lender may transfer all of its rights and obligations under a facility to a new lender with the prior consent of the borrower unless that transfer is made to a new lender:

•              that is on the white list

•              that is another lender, or

•              at a time when an event of default is continuing

Payment mechanics

On each date that a lender is required to make a payment under the Facilities, they must make the payment to an agent (the Agent).

The Agent shall distribute the amount received, to the party entitled to receive that payment.

In the event the Agent receives payment for application against amounts due in respect of the Facilities that is insufficient to discharge all the amounts then due and payable by the lenders, the money is paid:

•         firstly, towards payment pro rata of any unpaid fees, costs and expenses of, and other amount owing to, the Agent

•         secondly, towards payment pro rata of any accrued interest, fee or commission due but unpaid

•         thirdly, towards payment pro rata of any principal due but unpaid, and

•         fourthly, towards payment pro rata of any other sum due but unpaid.

The original lenders

Schedule 1 of the SFA provides that the original lenders to the SFA are:

•           Bank Co 1 for Facility A, and

•           Bank Co 2 for the Revolving Facility.

Facility A draw down

Fin Co drew down USD under Facility A in June 20xx.

September 20xx Syndication

When the Syndicated Facility was entered into by the lenders and Fin Co, it was always intended that more parties would join the Syndicated Facility later.

In September 20xx, Fin Co entered into a Syndication and Amendment Agreement (September 20xx Syndication Agreement), under which:

•              A syndicate of lenders would join the Syndicated Facility thereby reducing the original lenders' overall commitment (Loan Syndication).

•              The loan commitments for Facility A increased. Of this amount, Bank Co 1's commitment in relation to Facility A was reduced with the new lenders (the 'September 20xx Syndicate Lenders) providing the remaining amount.

•              The loan commitments for Facility B increased.

•              Bank Co 2's commitment in relation to the Revolving Facility was reduced.

•              New lenders committing to the remaining commitment amounts under Facility B and the Revolving Credit Facility.

September 20xx Syndication Agreement

Amendment

At the time of Loan Syndication, the SFA was amended.

Payment by new lenders

Each of the September 20xx Syndicate Lenders paid to the account of the Agent an amount equal to their Facility A participation.

The Agent distributed the participation payment to Bank Co 1 in the amount to which it was entitled to.

Transfer by novation

Each existing lender transferred by novation all or part of its commitment, rights and obligations under the SFA to a new lender and each new lender received such transfers and/or assumed any new addition or increased commitment so that each existing lender was, and each new lender became, a lender under the amended facility agreement.

To the extent each existing lender novated its rights and obligations under the SFA, the existing lender and Fin Co were released from obligations to one another under the SFA and their respective rights against one another were cancelled (being the "Discharged Rights or Obligations"). Each new lender and Fin Co assumed obligations towards one another and/or acquired rights against one another which differed from the Discharged Rights or Obligations.

December 20xy Refinancing

In December 20xy, Fin Co again refinanced the Syndicated Facility by entering into the Syndication, Amendment and Restatement Agreement (December 20xy Refinancing Agreement).

The December 20xy Refinancing Agreement:

•              Extended the terms of the Facilities

•              Increased the size of Facility A, and

•              Decreased the size of Facility B.

Further, the composition of the lenders to Facility A (collectively the December 20xy Syndicate Lenders) changed as follows:

•              Some existing lenders withdrew from the September 20xx Syndication Agreement (Leaving Lenders)

•              Existing lenders increased their loan commitment, and

•              New lenders joined and provided commitment towards Facility A (December New Lenders).

December 20xy Refinancing Agreement

Amendment

In December 20xy, the SFA was amended (Amended Facility Agreement).

Payment from the new lenders and existing lenders

Each of the new lenders and existing lenders who were increasing their commitment paid to the account of the Agent. The Agent was required to distribute the participation payment to existing lenders having regard to each existing lender's Facility A participation, Facility B and Revolving Facility participation.

Transfer by novation

Each existing lender transferred by novation all or part of its commitment, rights and obligations under the SFA to a new lender and each new lender received such transfers and/or assumed any new additional or increased commitment so that each existing lender was, and each new lender became, a lender under the Amended Facility Agreement.

To the extent that each existing lender novated its rights and obligations under the SFA, the existing lender and Fin Co were released from obligations to one another under the SFA and their respective rights against one another were cancelled (being the "Discharged Rights or Obligations"). Each new lender and Fin Co assumed obligations towards one another and/or acquired rights against one another which differed from the Discharged Rights or Obligations.

Accounting treatment of the SFA

The total amount borrowed under the SFA was disclosed as separate facilities in the notes of the audited financial statements. Each facility was recognised separately in the underlying trial balances of Fin Co.

Other matters

The functional currency for Fin Co is AUD.

Assumption(s)

Any losses that Head Co made under the Existing Loan were deductible as they were made in gaining or producing assessable income.

The USD to AUD exchange rates were different in June 20xx, September 20xx and December 20xy.

Question 1

Will Facility A, Facility B and the Revolving Facility made available under the Syndicated Facility Agreement together be considered a single arrangement pursuant to subsection 230-55(4) of the Income Tax Assessment Act 1997?

Summary

No, Facility A, Facility B and the Revolving Facility made available under the Syndicated Facility Agreement together will not be considered a single arrangement pursuant to subsection 230-55(4).

Detailed Reasoning

Division 230 deals with the tax treatment of gains or losses arising from a taxpayer's financial arrangement. To work out if you have a financial arrangement under section 230-45, it is necessary to first work out what the arrangement is that you are testing under Division 230.

Arrangement is defined in subsection 995-1(1) to mean 'any arrangement, agreement, understanding, promise, or undertaking, whether express or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings'.

Subsection 230-55(4) sets out the criteria which must be considered when determining, for the purposes of Division 230, whether a number of rights and/or obligations are themselves an arrangement or are 2 or more separate arrangements.

There is no specified weighting given to each matter. Paragraph 138 of Taxation Ruling 2012/4 Income Tax: the operation of subsection 230-55(4) of the Income Tax Assessment Act 1997 (ITAA 1997) in determining what is an 'arrangement' for the purposes of the taxation of financial arrangements under Division 230 of the ITAA 1997 (TR 2012/4) provides that:

...regard must be had to each factor in deciding whether there is one or more 'arrangement' and the provision does not provide a weighting or priority as between these criteria...it may be that one or more criteria are more significant than others.

Having regard to the criteria in subsection 230-55(4) the Facilities are not considered together to be a single arrangement because:

•              under each of Facility A, Facility B and the Revolving Facility the interest rates, currency denomination, and loan ceiling are different, and the interest periods can be different under each drawdown

•              under the SFA, the purpose for which the funds can be used is different for the facilities as Funds from Facility A and Facility B can be used to refinance the Existing Loan, while funds from the Revolving Facility can be used as working capital

•              Fin Co can draw down on each facility by delivering a utilisation request, which must identify the specific Facility and the amount of the draw down

•              Head Co has advised that, for accounting purposes, the total amount borrowed under the Syndicated Facility was disclosed as separate Facilities in the notes of the audited financial statements and each Facility was recognised separately in the underlying trial balances of Fin Co, and

•              treating the Syndicated Facility as a single arrangement would not be consistent with the objectives of Division 230 as it would not reflect the ordinary commercial practices associated with such syndicated loan facilities.

Question 2

Will Facility A of the Syndicated Facility constitute a financial arrangement for the purposes of section 230-45 of the Income Tax Assessment Act 1997?

Summary

Yes, Facility A of the Syndicated Facility is a financial arrangement for the purposes of section 230-45.

Detailed Reasoning

A two-step process is necessary to determine whether Facility A is a financial arrangement under Division 230:

1.    identify the scope of the arrangement being tested under subsection 230-55(4), and

2.    assess the arrangement against the requirements outlined in section 230-45.

Step one

Subsection 230-55(4) sets out the criteria which must be considered when determining, for the purposes of Division 230, whether a number of rights and/or obligations are themselves an arrangement or are 2 or more separate arrangements.

There is no specified weighting given to each matter. Paragraph 138 of Taxation Ruling 2012/4 Income Tax: the operation of subsection 230-55(4) of the Income Tax Assessment Act 1997 (ITAA 1997) in determining what is an 'arrangement' for the purposes of the taxation of financial arrangements under Division 230 of the ITAA 1997 (TR 2012/4) provides that:

...regard must be had to each factor in deciding whether there is one or more 'arrangement' and the provision does not provide a weighting or priority as between these criteria...it may be that one or more criteria are more significant than others.

Having regard to the criteria in subsection 230-55(4) Facility A is a single arrangement because:

•              Fin Co must repay the aggregate Facility A loans in full on the termination date regardless of who the lender is and when the loan was drawn down

•              Fin Co can borrow from one aggregate total commitment under Facility A and a single interest rate applies in respect of all loans made under Facility A

•              although there can be different lenders to Facility A, the syndication allows Fin Co to obtain the financing it requires under Facility A for a single purpose of refinancing the Existing Loan

•              although a lender can transfer all or some of its rights and obligations under Facility A, the rights and obligations under Facility A generally cannot be dealt with separately

•              Fin Co has advised that, for accounting purposes, the total amount borrowed under Facility A was disclosed in the notes of the audited financial statements and Facility A was recognised separately in the underlying trial balances of Fin Co, and

•              having regard to Division 230, treating Facility A as an arrangement would be consistent with its objectives because it would not distort commercial decision making and would align tax and commercial recognition of gains and losses from financial arrangements and minimise compliance costs.

Step two

Once the arrangement has been identified under subsection 230-55(4), it must then be considered whether it meets the definition of a financial arrangement under section 230-45.

Section 230-45(1) states:

You have a financial arrangement if you have, under an *arrangement:

(a)  a *cash settlable legal or equitable right to receive a *financial benefit; or

(b)  a cash settlable legal or equitable obligation to provide a financial benefit; or

(c)   a combination of one or more such rights and/or one or more such obligations;

unless:

(d)  you also have under the arrangement one or more legal or equitable rights to receive something and/or one or more legal or equitable obligations to provide something; and

(e)  for one of those rights and/or obligations covered by paragraph (d):

(i)    the thing that you have the right to receive, or the obligation to provide, is not a financial benefit; or

(ii)   the right or obligation is not cash settlable; and

(f)    the one or more rights and/or obligations covered by paragraph (e) are not insignificant in comparison with the right, obligation or combination covered by paragraph (a), (b) or (c).

The right, obligation or combination covered by paragraph (a), (b) or (c) constitutes the financial arrangement.

Subsection 230-45(2) states that a right you have to receive, or an obligation you have to provide, a financial benefit is cash settlable if the benefit is money or a money equivalent.

Under Facility A, Fin Co has the right to receive amounts in USD upon draw down, the obligation to pay interest amounts in respect of the amounts drawn down, and the obligation to repay the principal amount.

Under Facility A, Fin Co has cash settlable legal or equitable rights or obligations to provide financial benefits and does not have any legal or equitable rights to receive something and/or one or more legal or equitable obligations to provide something of the sort described in paragraphs 230-45(1)(d) - (f). Accordingly, Facility A will constitute a financial arrangement for the purposes of section 230-45.

Conclusion

Facility A of the Syndicated Facility constitutes a single financial arrangement for the purposes of section 230-45.

Question 3

On the syndication of the Syndicated Facility in September 20xx (and specific to Facility A), did Head Co make an assessable gain or a deductible loss pursuant to section 230-15 of the Income Tax Assessment Act 1997 during the income year ended 31 December 20xx when the original lender novated part of its lending commitment as a result of the variations in the USD to AUD exchange rate?

Summary

Yes, Head Co made an assessable gain or a deductible loss under section 230-15 during the income year ended 31 December 20xx when the original lender novated part of its lending commitment.

Detailed Reasoning

The Single Entity Rule

As Fin Co is a subsidiary member of the Head Co Group, under the single entity rule (SER) contained in section 701-1, during any period that Fin Co is a subsidiary member of the Head Co Group, Fin Co is considered to be part of Head Co for head company core purposes, and any assessable gains or deductible losses made by Fin Co are considered to be made by Head Co.

Gain or loss

Subsection 230-15(1) states:

Your assessable income includes a gain you make from a *financial arrangement.

Subsection 230-15(2) states:

You can deduct a loss you make from a *financial arrangement, but only to the extent that:

(a)  you make it in gaining or producing your assessable income; or

(b)  you necessarily make it in carrying on a *business for the purpose of gaining or producing your assessable income.

There is no definition for 'gain' or 'loss' in Division 230, however the Explanatory Memorandum to the Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2008 provides that the concept of gain or loss connotes the appropriate offsetting of the cost (financial benefits provided or to be provided, or rights to financial benefits forgone under the financial arrangement) against proceeds (financial benefits received or to be received, or obligations to pay financial benefits saved under the financial arrangement).

Timing of gain or loss

The timing of the gain or loss is determined by reference to the timing methods outlined in section 230-40.

A balancing adjustment under section 230-45 will not occur because:

•              Fin Co has not transferred all of its rights and/or obligations under a financial arrangement

•              all of Fin Co's rights in relation to Facility A have not ceased

•              Fin Co has not transferred to another entity any of its rights or obligations under Facility A, and

•              Facility A has not ceased to be a financial arrangement.

Instead, a portion of Fin Co's rights and obligations with the original lender have ceased and new obligations have commenced with the September 20xx Syndicate Lenders.

Head Co have not made any choice to apply any of the elective tax timing methods, so the methods that apply in respect of Facility A to take into account gains and losses made under Facility A are the accruals and realisation methods contained in Subdivision 230-B (see section 230-40).

Subsection 230-100(5) provides that the realisation method applies to a gain or loss that you have from a financial arrangement if the accruals method does not apply to that gain or loss.

Accruals method

Generally, for the accruals method to apply to a gain or loss under section 230-100, the gain or loss must arise from a financial arrangement and be sufficiently certain.

Subsection 230-105(1) explains when a gain or loss will be sufficiently certain:

You have a sufficiently certain overall gain or loss from a *financial arrangement at the time when you start to have the arrangement only if it is sufficiently certain at that time that you will make an overall gain or loss from the arrangement of:

(a)  a particular amount; or

(b)  at least a particular amount.

The amount of the gain or loss is the amount referred to in paragraph (a) or (b).

Subsection 230-115(2) explains the meaning of sufficiently certain:

A *financial benefit that you are to receive or provide is to be treated as one that you are sufficiently certain to receive or to provide only if:

(a)  it is reasonably expected that you will receive or provide the financial benefit (assuming that you will continue to have the *financial arrangement for the rest of its life); and

(b)  at least some of the amount or value of the benefit is, at that time, fixed or determinable with reasonable accuracy.

Interest accrues during each interest period on amounts drawn down from Facility A and calculated according to the terms of the SFA. It is reasonable to expect that Fin Co will pay the interest, and at least some of the amount or value of the interest is fixed or determinable with reasonable accuracy from the time of the draw down from Facility A.

Subsection 230-115(8) provides that if all of the financial benefits provided and received under the financial arrangement are denominated in a particular foreign currency, they are not to be translated into the person's applicable functional currency or Australian currency for the purposes of applying subsection 230-115(2).

Facility A and all of the interest paid on Facility A are denominated in USD. Accordingly, foreign exchange movements are not relevant when determining whether a gain or loss on the interest on Facility A is sufficiently certain.

Head Co will have a sufficiently certain loss in respect of the interest on Facility A and the accruals method should apply to the loss.

Realisation method

Subsection 230-100(5) provides that the realisation method provided for in Subdivision 230-B applies to a gain or loss that you have from a financial arrangement if the accruals method does not apply to that gain or loss.

Subsection 230-180(1) states that if a gain or loss is to be taken into account using the realisation method, you are taken, for the purposes of section 230-15, to make the gain or loss for the income year in which the gain or loss occurs.

Paragraph 230-180(2)(a) provides that, for these purposes, if the last of the financial benefits, rights and obligations taken into account in determining the amount of the gain or loss is a financial benefit, the gain or loss from a financial arrangement is taken to occur at the time the financial benefit is provided.

On the novation of the Syndicated Facility in September 20xx, Fin Co was taken to have repaid the original lender's Facility A participation and as such Fin Co's obligations to the original lender ceased. When Fin Co's obligations ceased, Head Co will have made a gain (or loss) where the financial benefit received in respect of that obligation was more (or less) than the financial benefit provided in respect of that obligation as a result of fluctuations in the AUD to USD exchange rate.

Therefore, a gain or loss would have resulted from the difference between:

•              the USD received by Fin CO when translated into AUD in June 20xx, and

•              the USD provided by Fin Co when translated into AUD in September 20xx.

A gain would be assessable under subsection 230-15(1) as it is made under a financial arrangement (Facility A).

Paragraph [42] of Taxation Ruling 95/25 Income tax: deductions for interest under section 8-1 of the Income Tax Assessment Act 1997 following FC of T v Roberts; FC of T v Smith (TR 95/25) explains the refinancing principle:

42. Interest on a new loan will be deductible if the new loan is used to repay an existing loan which, at the time of the second borrowing, was being used in an assessable income producing activity or used in a business activity which is directed to the production of assessable income (Roberts and Smith ATC at 4388; ATR at 504).

Pursuant to the refinancing principle, Facility A will retain the purpose of the Existing Loan, which was to fund the purchase of Op Co. As such, a loss would be deductible under subsection 230-15(2) because it is made under a financial arrangement (Facility A) and has a sufficient nexus with the earning of assessable income.

Conclusion

Head Co would have made an assessable gain or a deductible loss pursuant to section 230-15 during the income year ended 31 December 20xx as a result of variations in the USD and AUD exchange rate when the original lender novated part or all of its lending commitment.

Question 4

When the Syndicated Facility was refinanced in December 20xy (and specific to Facility A) did Head Co make an assessable gain or a deductible loss pursuant to section 230-15 of the Income Tax Assessment Act 1997 during the income year ended 31 December 20xy, when the Leaving Lenders novated all or part of their lending commitments as a result of variations in the USD to AUD exchange rates?

Summary

Yes, Head Co made an assessable gain or a deductible loss under section 230-15 during the income year ended 31 December 20xy when the Leaving Lenders novated all or part of their lending commitment.

Detailed Reasoning

The Single Entity Rule

As Fin Co is a subsidiary member of the Head Co Group, under the SER contained in section 701-1, during any period that Fin Co is a subsidiary member of the Head Co Group, Fin Co is considered to be part of Head Co for head company core purposes, and any assessable gains or deductible losses made by Fin Co are considered to be made by Head Co.

Gain or loss

Subsection 230-15(1) states:

Your assessable income includes a gain you make from a *financial arrangement.

Subsection 230-15(2) states:

You can deduct a loss you make from a *financial arrangement, but only to the extent that:

(c)   you make it in gaining or producing your assessable income; or

(d)  you necessarily make it in carrying on a *business for the purpose of gaining or producing your assessable income

There is no definition for 'gain' or 'loss' in Division 230, however the Explanatory Memorandum to the Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2008 provides that the concept of gain or loss connotes the appropriate offsetting of the cost (financial benefits provided or to be provided, or rights to financial benefits forgone under the financial arrangement) against proceeds (financial benefits received or to be received, or obligations to pay financial benefits saved under the financial arrangement).

Timing of gain or loss

The timing of the gain or loss is determined by reference to the timing methods outlined in section 230-40.

A balancing adjustment under section 230-435 will not occur because:

•              Fin Co has not transferred all of their rights and/or obligations under a financial arrangement

•              all of Fin Co's rights in relation to Facility A have not ceased

•              Fin CO has not transferred to another entity any of its rights or obligations under Facility A, and

•              Facility A has not ceased to be a financial arrangement.

Instead, Fin Co's rights and obligations with the Leaving Lenders have ceased. New obligations have been created with some of the existing lenders and the December New Lenders.

Head Co has not made any choice to apply any of the elective tax timing methods, so the methods apply in respect of Facility A to take into account gains and losses made under Facility A are the accruals and realisation methods contained in Subdivision 230-B (see section 230-40).

Subsection 230-100(5) provides that the realisation method applies to a gain or loss that you have from a financial arrangement if the accruals method does not apply to that gain or loss.

Accruals method

Generally, for the accruals method to apply to a gain or loss under section 230-100, the gain or loss must arise from a financial arrangement and be sufficiently certain.

As discussed above, Head Co has a sufficiently certain loss in respect of the interest on Facility A, which is not affected by foreign exchange movements. Accordingly, the accruals method will apply to this loss.

Realisation method

Subsection 230-100(5) provides that the realisation method applies to a gain or loss that you have from a financial arrangement if the accruals method does not apply to that gain or loss.

Subsection 230-180(1) states that if a gain or loss is to be taken into account using the realisation method, you are taken, for the purposes of section 230-15 to make the gain or loss for the income year in which the gain or loss occurs.

Paragraph 230-180(2)(a) provides that, for these purposes, if the last of the financial benefits, rights and obligations taken into account in determining the amount of the gain or loss is a financial benefit, the gain or loss from a financial arrangement is taken to occur at the time the financial benefit is provided.

On the novation of the Syndicated Facility in December 20xy, Fin Co was taken to have repaid the Leaving Lenders' Facility A participation and as such Fin Co's obligations to the Leaving Lenders ceased. When Fin Co's obligations ceased, Head Co will have made a gain (or loss) where the financial benefit received in respect of that obligation was more (or less) than the financial benefit provided in respect of that obligation as a result of fluctuations in the AUD to USD exchange rate.

A gain would be assessable under section 230-15(1) as it is a gain made under a financial arrangement (Facility A)

Pursuant to the refinancing principle (see TR 95/25), Facility A will retain the purpose of the Existing Loan, which was to fund the purchase of Op Co. As such, a loss would be deductible under subsection 230-15(2) because it is made under a financial arrangement (Facility A) and has a sufficient nexus with the earning of assessable income.

Conclusion

Head Co would have made an assessable gain or a deductible loss pursuant to section 230-15 during the income year ended 31 December 20xy when the Leaving Lenders novated all or part of its lending commitment as a result of variations in the USD to AUD Exchange rate.

Copyright notice

© Australian Taxation Office for the Commonwealth of Australia

You are free to copy, adapt, modify, transmit and distribute material on this website as you wish (but not in any way that suggests the ATO or the Commonwealth endorses you or any of your services or products).