Income Tax Assessment Act 1997



Division 820 - Thin capitalisation rules  

Subdivision 820-A - Preliminary  

SECTION 820-40   Meaning of debt deduction  

Debt deduction , of an entity and for an income year, is a cost incurred by the entity in relation to a *debt interest issued by the entity, to the extent to which:

(a) the cost is:

(i) interest, an amount in the nature of interest, or any other amount that is calculated by reference to the time value of money; or

(ii) the difference between the *financial benefits received, or to be received, by the entity under the *scheme giving rise to the debt interest and the financial benefits provided, or to be provided, under that scheme; or

(iii) any amount directly incurred in obtaining or maintaining the financial benefits received, or to be received, by the entity under the scheme giving rise to the debt interest; or

(iv) any other expense incurred by the entity that is specified in the regulations made for the purposes of this subparagraph; and

(b) the entity can, apart from this Division, deduct the cost from its assessable income for that year;

(c) (Repealed by No 101 of 2006)

A cost covered by paragraph (1)(a) includes, but is not limited to, any of the following:

(a) an amount in substitution for interest;

(b) a discount in respect of a security;

(c) a fee or charge in respect of a debt, including application fees, line fees, service fees, brokerage and stamp duty in respect of document registration or security for the debt interest;

(d) an amount that is taken under an *income tax law to be an amount of interest in respect of a lease, a hire purchase arrangement or any other *arrangement specified in that law;

(e) any loss in respect of:

(i) a reciprocal purchase agreement (otherwise known as a repurchase agreement);

(ii) a sell-buyback arrangement;

(iii) a securities loan arrangement;

(f) any amount covered by paragraph (1)(a) that has been assigned or is dealt with in any way on behalf of the party who would otherwise be entitled to that amount.

To avoid doubt, the following amounts that are incurred by an entity in relation to a *debt interest issued by the entity are not covered by paragraph (1)(a):

(a) losses and outgoings directly associated with hedging or managing the financial risk in respect of the debt interest;

(b) losses incurred by the entity in relation to which the following apply:

(i) the losses would otherwise be a cost covered by subparagraph (1)(a)(ii); but

(ii) the benefits mentioned in that subparagraph are measured in a foreign currency or a unit of account other than Australian currency (for example, ounces of gold) and the losses have arisen only because of changes in the rate of converting that foreign currency or that unit of account into Australian currency;

(c) salary or wages;

(d) rental expenses for a lease if the lease is not a debt interest;

(e) an expense specified in the regulations made for the purposes of this paragraph.


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