Income Tax Assessment Act 1997

CHAPTER 6 - THE DICTIONARY

PART 6-1 - CONCEPTS AND TOPICS

Division 974 - Debt and equity interests

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History

Division 974 inserted by No 163 of 2001, s 3 and Sch 1 item 34.

Act No 136 of 2010 , s 3 and Sch 3 item 135, contains the following provision, effective 7 December 2010:

Extension of debt and equity transitional arrangements for Upper Tier 2 capital instruments
Definitions

(1)
In this item:
CGT amendments
has the same meaning as in item 118 of Schedule 1 to the New Business Tax System (Debt and Equity) Act 2001 .

debt and equity test amendments
means the amendments made by Schedule 1 to the New Business Tax System (Debt and Equity) Act 2001 (other than the CGT amendments), as amended from time to time.

Upper Tier 2 capital instruments

(2)
This item applies to an interest:

(a) that is issued before 1 July 2001; and

(b) that is an instrument known as an Upper Tier 2 capital instrument; and

(c) to which an election under paragraph 118(6)(b) of the New Business Tax System (Debt and Equity) Act 2001 does not apply.

(3)
For the purposes of subitem (2), an interest is taken to be issued on or after 1 July 2001 if:

(a) the interest is issued on or after that date; or

(b) the interest is issued before that date, and:

(i) the terms of the interest are altered on or after that date; or

(ii) the interest is rolled over on or after that date; or

(iii) the original term of the interest is extended on or after that date.

In applying subparagraph (b)(i), disregard:

(c) minor alterations that do not affect rights and obligations in relation to the interest; and

(d) alterations that permit or require any deferred payments under the interest to accumulate.

Application of debt and equity test amendments

(4)
Despite paragraph 118(6)(a) of the New Business Tax System (Debt and Equity) Act 2001 , the debt and equity test amendments apply only to transactions that take place in relation to the interest on or after 1 July 2010 if the issuer of the interest does not make an election under paragraph 118(6)(b) of that Act.

(5)
If subitem (4) applies to an interest:

(a) the interest is disregarded for the purposes of paragraph 164-10(1)(b) and subsection 164-15(3) of the Income Tax Assessment Act 1997 ; and

(b) section 164-15 of the Income Tax Assessment Act 1997 applies to the interest as if references in paragraph 164-15(3)(b) and subsection 164-15(4) to 1 July 2001 were references to 1 July 2010.

(6)
A reference in this item to a transaction includes a reference to:

(a) making a return; and

(b) paying a dividend or unit trust dividend; and

(c) making a distribution in relation to a unit trust; and

(d) paying, crediting or lending an amount; and

(e) making a non-share distribution; and

(f) forgiving a debt; and

(g) redeeming, cancelling or buying back an interest; and

(h) converting an interest.

Act No 163 of 2001, s 3 and Sch 1 item 118 (as amended by No 162 of 2005, s 3 and Sch 6 items 26 and 27), contained the following application provisions:

(1) Definitions.
In this item:
CGT amendments
means the amendments made by items 7 to 32 of this Schedule.

debt and equity test amendments
means the amendments made by this Schedule (other than the CGT amendments).

(2) Application of debt and equity test amendments.
The debt and equity test amendments apply to transactions that take place on or after 1 July 2001. This is so whether the interest in relation to which the transaction takes place was issued before, or is issued on or after, that date. This subitem has effect subject to subitem (6).
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Subitem 118(2) amended by No 162 of 2005.

(3) Application of the CGT amendments.
The amendments made by items 7 to 11 of this Schedule apply to:

(a) equity interests issued or allotted; and

(b) options granted;
on or after 1 July 2001.

(4)
The amendments made by items 12 to 32 of this Schedule apply to the conversion of a convertible interest, or the exercise of a right, on or after 1 July 2001.

(5)
Section 130-40 of the Income Tax Assessment Act 1997 applies to all convertible notes acquired before 20 September 1985 as if they were convertible interests.

(6) Application of debt and equity test amendments to interests issued before 1 July 2001.
If an interest was issued before 1 July 2001, the debt and equity test amendments:

(a) apply only to transactions that take place in relation to the interest on or after 1 July 2004 if the issuer of the interest does not make an election under paragraph (b); and

(b) apply to transactions that take place in relation to the interest on or after 1 July 2001 if the issuer elects to have this paragraph apply to the interest.

(7)
For the purposes of subitem (6), an interest is taken to be issued on or after 1 July 2001 if:

(a) the interest is issued on or after that date; or

(b) the interest is issued before that date; and:

(i) the terms of the interest are altered on or after that date; or

(ii) the interest is rolled over on or after that date; or

(iii) the original term of the interest is extended on or after that date.

In applying subparagraph (b)(i), disregard minor alterations that do not affect rights and obligations in relation to the interest.

(9)
If paragraph (6)(a) applies to an interest:

(a) paragraph 164-10(1)(b) of the Income Tax Assessment Act 1997 applies to the interest as if the second reference in that paragraph to " 1 July 2001 " were instead a reference to " 1 July 2004 " ; and

(b) section 164-15 of the Income Tax Assessment Act 1997 applies to the interest as if the following references were instead references to " 1 July 2004 " :

(i) the first reference in subsection 164-15(3) to " 1 July 2001 " ;

(ii) the reference in subsection 164-15(3) to " that day " ;

(iii) the references in paragraph 164-15(3)(b) and subsection 164-15(4) to " 1 July 2001 " .

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Subitem 118(9) substituted by No 162 of 2005.

(10)
An election in relation to an interest is effective for the purposes of paragraph (6)(b) only if:

(a) the election is lodged with the Commissioner within:

(i) 90 days after the day on which this Act receives the Royal Assent; or

(ii) such further time as the Commissioner allows; and

(b) an election under paragraph (6)(b) is made in relation to all other interests that:

(i) were issued by the issuer before 1 July 2001; and

(ii) are substantially similar to that interest and in relation to which an election under that subitem can be made; and

(c) the election contains the following information:

(i) the name of the issuer;

(ii) the tax file number of the issuer;

(iii) the legal form of the interest;

(iv) ASX code or other stock exchange listing code allotted to the issue (if applicable);

(v) the date of the issue;

(vi) the face value of the issue;

(vii) the number of interests of that kind on issue when the election is made;

(viii) coupon/dividend rates and terms including contingencies;

(ix) maturity details;

(x) redemption details and terms including contingencies;

(xi) conversion/exercise details.

An election under paragraph (6)(b) cannot be revoked.

(11)
The Commissioner may allow further time under subparagraph (10)(a)(ii) if he or she:

(a) is satisfied that the issuer would otherwise not have sufficient opportunity to make the election; or

(b) otherwise considers it reasonable to do so.

(12)
If:

(a) paragraph (6)(a) applies to an interest; and

(b) on or after 1 July 2001 and before 1 July 2004:

(i) the terms of the interest are altered; or

(ii) the interest is rolled over; or

(iii) the original term of the interest is extended;

then:

(c) the debt and equity test amendments apply to the transactions in relation to the interest that take place after the event referred to in paragraph (b) occurs; and

(d) subitem (9) applies to the interest as if references in that subitem to 1 July 2004 were references to the time when that event occurs.
In applying subparagraph (b)(i), disregard minor alterations that do not affect rights and obligations in relation to the interest.

(13)
A reference in this item to a transaction includes a reference to:

(a) making a return; and

(b) paying a dividend or unit trust dividend; and

(c) making a distribution in relation to a unit trust; and

(d) paying, crediting or lending an amount; and

(e) making a non-share distribution; and

(f) forgiving a debt; and

(g) redeeming, cancelling or buying back an interest; and

(h) converting an interest.

Subdivision 974-A - General

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Operative provisions

SECTION 974-10 Object

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974-10(1)
An object of this Division is to establish a test for determining for particular tax purposes whether a *scheme, or the combined operation of a number of schemes:

(a) gives rise to a *debt interest; or

(b) gives rise to an *equity interest.

Note 1:

The test is used, for example, for:

(a) identifying distributions that may be frankable and which may be subject to dividend withholding tax; and

(b) identifying returns that may be deductible to the company making the return; and

(c) resolving uncertainty as to the proper tax treatment for debt/equity hybrid interests (interests that have some debt qualities and some equity qualities); and

(d) identifying debt capital for the purposes of Division 820 (thin capitalisation rules).

Note 2:

Subdivision 167-A has special rules for working out rights to dividends and capital distributions in a company whose shares do not all carry the same rights to those matters. Those rules include disregarding debt interests.

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974-10(2)
Another object of this Division is that the test referred to in subsection (1) is to operate on the basis of the economic substance of the rights and obligations arising under the *scheme or schemes rather than merely on the basis of the legal form of the scheme or schemes.

Note 1:

The basic indicator of the economic character of a debt interest is the non-contingent nature of the returns. The basic indicator of the economic character of an equity interest, on the other hand, is the contingent nature of the returns (or convertibility into an interest of that nature).

Note 2:

The test is intended to operate, for example, to:

(a) deny deductibility (but allow franking) for " interest " in relation to a scheme that has the legal form of a loan if the economic substance of the rights and obligations arising under the relevant scheme gives the interest characteristics that are the same as or similar to those of a dividend on an ordinary share (and thereby prevent deductible returns on equity); and

(b) allow a deduction (but not franking) for a " dividend " in relation to a scheme that has the legal form of an ordinary share if the economic substance of the rights and obligations arising under the relevant scheme gives the dividend characteristics that are the same as or similar to those of deductible interest on an ordinary loan (and thereby prevent frankable returns on debt).

This will not happen if a provision in this Act specifically provides for a different treatment for the interest or dividend.

974-10(3)
Another object of this Division is that the combined effect of *related schemes be taken into account in appropriate cases:

(a) to ensure that the test operates effectively on the basis of the economic substance of the rights and obligations arising under the schemes rather than merely on the basis of the legal form of the schemes; and

(b) to prevent the test being circumvented by entities merely entering into a number of separate schemes instead of a single scheme.

974-10(4)
Another object of this Division is to identify the distributions and credits made in respect of *non-share equity interests in a company that are to be treated as *dividends ( non-share dividends ) and those that are to be treated as returns of capital ( non-share capital returns ).

Note:

Non-share dividends will generally be included in the recipient ' s assessable income and may be frankable.

974-10(5)
The Commissioner must have regard to the objects stated in subsections (1) to (3) in exercising the power to make a determination under any of the following provisions:

(a) subsection 974-15(4) ;

(b) subsection 974-60(3) , (4) or (5);

(c) section 974-65 ;

(d) subsection 974-70(4) ;

(e) subsection 974-150(1) .

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Note:

An entity can apply to the Commissioner to have a determination made and can object under Part IVC of the Taxation Administration Act 1953 if it is dissatisfied with a determination (see section 974-112 ).

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974-10(6)
Regulations may also be made under the provisions of this Division:

(a) to clarify the meaning of certain words and phrases in the light of emerging commercial practices, conditions and products; and

(b) to give guidance on the detailed operation of particular provisions.

The regulations must be consistent with the objects stated in subsections (1) to (3).

974-10(7)

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Without limiting subsection 13(3) of the Legislation Act 2003 , the regulations made for the purposes of this Division may specify different rules for different classes of circumstances.

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