Income Tax Assessment Act 1997
The arm ' s length debt amount is a notional amount that, having regard to the factual assumptions set out in subsection (2) and the relevant factors mentioned in subsection (3), would satisfy both paragraphs (a) and (b):
(a) the amount represents a notional amount of *debt capital that:
(i) the entity would reasonably be expected to have throughout the income year; and
(ii) would give rise to an amount of *debt deductions of the entity for that or any other income year; and
(iii) would be attributable to the entity ' s Australian business as mentioned in subsection (2);
(b) commercial lending institutions that were not *associates of the entity (the notional lenders ) would reasonably be expected to have entered into *schemes that would:
(i) give rise to *debt interests that constituted that notional amount of debt capital of the entity; and
(ii) provide for terms and conditions for the debt interests that would reasonably be expected to have applied if the entity and the notional lenders had been dealing at *arm ' s length with each other throughout the income year mentioned in subparagraph (1)(a)(i).
The entity must keep records in accordance with section 820-980 if the entity works out an amount under this section.
Irrespective of what actually happened during that year, the following assumptions must be made in working out that amount:
(a) the entity ' s commercial activities in connection with Australia (the Australian business ) during that year do not include:
(i) any *business carried on by the entity at or through its *overseas permanent establishments; and
(ii) the holding of any *associate entity debt, *controlled foreign entity debt or *controlled foreign entity equity; and
(b) the entity had carried on the Australian business that it actually carried on during that year;
(c) the nature of the entity ' s assets and liabilities (to the extent that they are attributable to the Australian business) had been as they were during that year;
(d) except as stated in paragraph (1)(b) and paragraphs (e), (f) and (g) of this subsection, the entity had carried on the Australian business in the same circumstances as what actually existed during that year;
(e) any guarantee, security or other form of credit support provided to the entity in relation to the Australian business during that year:
(i) by its *associates; or
is taken not to have been received by the entity;
(ii) by the use of assets of the entity that are attributable to the entity ' s overseas permanent establishments;
(f) the entity ' s only activities during that year were the Australian business;
(g) the entity ' s only assets and liabilities during that year were those referred to in paragraph (c) of this subsection.
However, the assumptions set out in paragraphs (f) and (g) of this subsection are not to be made in taking into account the relevant factors mentioned in subsection (3).
On the basis of the factual assumptions set out in subsection (2), the following factors must be taken into account in determining whether or not an amount satisfies paragraphs (1)(a) and (b):
(a) the functions performed, the assets used, and the risks assumed, by the entity in relation to the Australian business throughout that year;
(b) the terms and conditions of the *debt capital that the entity actually had in relation to the Australian business throughout that year;
(c) the nature of, and title to, any assets of the entity attributable to the Australian business that were available to the entity throughout that year as security for its debt capital for that business;
(d) the purposes for which *schemes for debt capital had been actually entered into by the entity in relation to the Australian business throughout that year;
(e) the entity ' s capacity to meet all its liabilities in relation to the Australian business (whether during that year or at any other time);
(f) the profit of the entity (within the meaning of the *accounting standards), and the return on its capital, in relation to the Australian business (whether during that year or at any other time);
(g) the debt to equity ratios of the following throughout that year:
(i) the entity;
(ii) the entity in relation to the Australian business;
(iii) each of the entity ' s *associate entities that engage in commercial activities similar to the Australian business;
(iv) each other entity in which the entity has a direct or indirect interest;
(h) the commercial practices adopted by independent parties dealing with each other at *arm ' s length in the industry in which the entity carries on the Australian business throughout that year (whether in Australia or in comparable markets elsewhere);
(i) the way in which the entity financed its commercial activities (other than the Australian business) throughout that year;
(j) the general state of the Australian economy throughout that year;
(k) all of the above factors existing at the time when the entity last entered into a scheme that gave rise to an actual *debt interest attributable to the Australian business that remains *on issue throughout that year;
(l) any other factors which are specified in the regulations made for the purposes of this section, including factors specific to an *outward investor (general) or an *outward investor (financial).
If the Commissioner considers an amount worked out by the entity under this section does not appropriately take into account the factual assumptions and the relevant factors, the Commissioner may substitute another amount that the Commissioner considers better reflects those assumptions and factors.
Disclaimer and notice of copyright applicable to materials provided by CCH Australia Limited
CCH Australia Limited ("CCH") believes that all information which it has provided in this site is accurate and reliable, but gives no warranty of accuracy or reliability of such information to the reader or any third party. The information provided by CCH is not legal or professional advice. To the extent permitted by law, no responsibility for damages or loss arising in any way out of or in connection with or incidental to any errors or omissions in any information provided is accepted by CCH or by persons involved in the preparation and provision of the information, whether arising from negligence or otherwise, from the use of or results obtained from information supplied by CCH.
The information provided by CCH includes history notes and other value-added features which are subject to CCH copyright. No CCH material may be copied, reproduced, republished, uploaded, posted, transmitted, or distributed in any way, except that you may download one copy for your personal use only, provided you keep intact all copyright and other proprietary notices. In particular, the reproduction of any part of the information for sale or incorporation in any product intended for sale is prohibited without CCH's prior consent.