Edited version of your private ruling

Authorisation Number: 1012515032614

Ruling

Subject: Application of thin capitalisation exemption under subsection 820-39(3).

Question 1

Will Company K satisfy the conditions in subsection 820-39(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes.

Relevant facts and circumstances

Company K was established as a Special Purpose Vehicle (SPE) in order to manage the risk of recovery of certain receivables that Company K assumed or created. Company K borrowed funds from Lenders pursuant to a Loan and used the funds to purchase the receivables from the Originator that are payable by Entity J as well as to make another loan.

Company K was established solely for the purpose of purchasing the receivables and to facilitate the financing for a Project to be completed by Entity J.

The Loan is a debt interest for Australian income tax purposes. The value of the Loan is at least 50% of the receivables.

Company K is restricted through various contractual requirements to activities necessary to perform the role of facilitating finance. Company K may not engage in any business or activity other than that which is necessary for, or incidental to, its role. Company K is restricted from issuing other debt.

At least one independent director was appointed to the board of Company K.

Company K's Constitution and the contractual requirements prohibit (the Prohibitions) Company K from:

· Merging or consolidating with another entity;

· Issuing any shares, units or grant any rights to acquire shares or units;

· Selling, disposing of an interest in its property other than that permitted within the transaction documents; and

· Amending its Constitution and the relevant transaction documents.

Company K will also display Sound Management by, for example:

· keeping proper and adequate books and records, as would be expected of a prudent and competent person undertaking similar obligations as Company K on similar projects;

· keeping a complete and up to date register of assets and proper books of account that give a true and fair view of its financial position and results of operations;

· at all times conducting its business in Company K's name only;

· ensuring that the Financial Reports and other financial statements furnished by Company K under the contractual requirements are prepared in accordance with Chapter 2M of the Corporations Act 2001 and Accounting Standards.

· acting in accordance with its Constituent Documents and relevant contractual requirements; and

· carrying on and conducting its business in accordance with all applicable laws in all material respects for particular elements of the contractual requirements to which it is a party. Company K must comply with all laws applicable to Company K, its assets and its business in all material respects.

Relevant legislative provisions

Income Tax Assessment Act 1997 Sub section 820-39(3)

Income Tax Assessment Act 1997 Paragraph 820-39(3)(a)

Income Tax Assessment Act 1997 Paragraph 820-39(3)(b)

Income Tax Assessment Act 1997 Paragraph 820-39(3)(c)

Income Tax Assessment Act 1997 Subsection 995-1(1)

Reasons for decision

All legislative references are to provisions of the Income Tax Assessment Act 1997 unless otherwise stated.

Subsection 820-39(3) states:

The conditions are:

(a)  the entity is one established for the purposes of managing some or all of the economic risk associated with assets, liabilities or investments (whether the entity assumes the risk from another entity or creates the risk itself); and

(b)  the total value of debt interests in the entity is at least 50% of the total value of the entity's assets; and

(c)  the entity is an insolvency-remote special purpose entity according to criteria of an internationally recognised rating agency that are applicable to the entity's circumstances.

Each of paragraphs 820-39(3)(a), (b) and (c) must be present for the requirements of subsection 820-39(3) to be satisfied. That is, the three paragraphs are conjunctive.

Paragraph 820-39(3)(a) Managing economic risk

The Commissioner accepts that in the circumstances of Company K, the requirement of paragraph 820-39(3)(a) is met as Company K was established for the purpose of managing some or all the risk associated with an asset that was either assumed or created by Company K, being the recovery of the receivable payments.

Paragraph 820-39(3)(b) Value of debt interests

As set out in the Relevant facts and circumstances, the Loan is a debt interest for Australian income tax purposes. The value of the Loan is at least 50% of the receivables.

Company K meets the paragraph 820-39(3)(b) requirement.

Paragraph 820-39(3)(c) Company K is an insolvency-remote special purpose entity

The role of a Special-Purpose Entity (SPE) is to limit the insolvency risk. Standard & Poor's 'Criteria for Special-Purpose Entities in Project Finance Transactions' which was issued 20 November 2000 and revised 4 March 2011 (S&P Criteria) sets out the criteria that S&P uses to assess the insolvency remoteness of an SPE in project financing. The S&P Criteria together with relevant aspects of the Relevant facts and circumstances are as follows:

· Restrictions on objects and powers.

· Debt

· Independent Director

· No merger or reorganisation

· Separateness

· Non-petition language in contracts to which the SPE is a party

Insolvency remoteness

The Commissioner accepts that in the circumstances of Company K above the S&P Criteria are satisfied.

The paragraph 820-39(3)(c) requirement is satisfied.

Overall conclusion

As each of the requirements set out in paragraphs 820-39(3)(a), (b) and (c) are present in the circumstances of Company K, Company K will satisfy the conditions in subsection 820-39(3).