Edited version of your private ruling

Authorisation Number: 1012537139258

Ruling

Subject: Taxation of financial arrangements (TOFA)

Question 1

To the extent that the funds raised from the financial instrument issuance have been used to recapitalise Company A's offshore subsidiaries, will any gain/loss attributable to currency exchange rate movements be NANE under subsections 230-30(2) and 230-30(3) of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the period from the date that the funds were used to recapitalise the offshore subsidiaries to the earlier of year end and repayment of the financial instrument?

Answer

Yes

Question 2

In respect of the period from the date that the financial instrument was issued to the date that the offshore subsidiaries were recapitalised, where during that period assessable income (i.e. interest income on the short term investment of those funds) was derived, whether the unrealised foreign exchange loss is deductible on a pro-rata basis based on the usage of funds under subsection 230-15(2)?

Answer

Yes

Question 3

Are borrowing costs in relation to the financial instrument placement deductible under subsection 230-15 of the ITAA 1997?

Answer

Yes

This ruling applies for the following period:

2012/2013 financial year.

The scheme commences on:

2012/2013 financial year.

Relevant facts and circumstances

This ruling is based on the facts stated in the description of the scheme that is set out below. If your circumstances are materially different from these facts, this ruling has no effect and you cannot rely on it. The fact sheet has more information about relying on your private ruling.

Company A is an Australian resident company and is the head company of the Australian tax consolidated group comprising itself and all of its subsidiary members.

Company B is a foreign tax resident, and the holding company of Foreign Operations A. Company B is a wholly-owned subsidiary of Company C, which is a member of the consolidated group.

Company D is a foreign tax resident, and the holding company of Foreign Operations B, Company D is a wholly-owned subsidiary of Company E, which is a member of the tax consolidated group.

The Company A Group comprises of the head office in Australia, and global divisions.

Relevant legislative provisions

Subsection 230-15(2) of the Income Tax Assessment Act 1997

Subsection 230-15(3) of the Income Tax Assessment Act 1997

Subsection 230-30(2) of the Income Tax Assessment Act 1997

Subsection 230-30 (2) of the Income Tax Assessment Act 1997

Paragraph 820-40(1)(a) of the Income Tax Assessment Act 1997

Section 23AJ of the Income Tax Assessment Act 1936

Question 1

Summary

To the extent that the funds raised from the financial instrument issuance have been used to recapitalise Company A's offshore subsidiaries, will any gain/loss attributable to currency exchange rate movements be NANE under subsections 230-30(2) and 230-30(3) of the Income Tax Assessment Act 1997 (ITAA 1997) in respect of the period from the date that the funds were used to recapitalise the offshore subsidiaries to the earlier of year end and repayment of the financial instrument?

Detailed reasoning

In order to determine whether a gain or loss attributable to currency rate movements will be NANE it is necessary to consider the application of section 230-30 of the ITAA 1997. The relevant provisions of section 230-30 for the purpose of this PBR are subsections 230-30(2) and 230-30(3).

To the extent to which a loss in relation to the borrowing has a nexus to activities that produce assessable income, the corresponding gain will not be NANE income under subsection 230-30(2) of the ITAA 1997. If the use of the funds borrowed has a nexus to both assessable income and NANE income production during the same income year, the foreign exchange gains would need to be apportioned to reflect the fact that to an extent, if it had been a loss, the taxpayer would have made it in gaining or producing both classes of income.

The losses attributable to currency exchange movements will be NANE under subsections 230-30(2) and 230-30(3) in respect of the period from the date that the funds were used to recapitalise the offshore subsidiaries to the earlier of year end and repayment of the Senior Debt as there is an expectation of NANE .

Question 2

Summary

In respect of the period from the date that the financial instrument was issued to the date that the offshore subsidiaries were recapitalised, where during that period assessable income (i.e. interest income on the short term investment of those funds) was derived, whether the unrealised foreign exchange loss is deductible on a pro-rata basis based on the usage of funds under subsection 230-15(2)?

Detailed reasoning

In determining the question of nexus, and whether the threshold for apportionment has been satisfied, the line of enquiry includes both the purpose of the borrowing, and the use to which the funds are put. There is a clear and sufficient connection between the foreign exchange loss and the interest derived.

Therefore, the unrealised foreign exchange loss is deductible on a pro-rata basis based on the usage of the funds.

Question 3

Summary

Are borrowing costs in relation to the financial instrument placement deductible under subsection 230-15 of the ITAA 1997?

Detailed reasoning

The borrowing costs in relation to the financial instrument placement are deductible under section 230-15 of the ITAA 1997. More specifically for the period of time the borrowing costs are deductible under subsection 230-15(2) and once the funds were used to recapitalise the offshore subsidiaries the borrowing costs are deductible under subsection 230-15(3).