Income Tax Assessment Act 1997

CHAPTER 4 - INTERNATIONAL ASPECTS OF INCOME TAX  

PART 4-5 - GENERAL  

Division 820 - Thin capitalisation rules  

Subdivision 820-B - Thin capitalisation rules for outward investing entities (non-ADI)  

Operative provisions

SECTION 820-105   Arm ' s length debt amount  

820-105(1)    
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) .

Note:

The entity must keep records in accordance with section 820-980 if the entity works out an amount under this section.

Factual assumptions

820-105(2)    

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

(ii) by the use of assets of the entity that are attributable to the entity ' s overseas permanent establishments;

is taken not to have been received by the entity;

(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) .

Relevant factors

820-105(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).

Commissioner ' s power

820-105(4)    
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.