Edited version of your written advice

Authorisation Number: 1012679467460

Ruling

Subject: Section 230-30 of the Income Tax Assessment Act 1997 (ITAA 1997)

Question 1

Will subsection 230-30(3) of the ITAA 1997 apply such that any loss Groupco makes on the face value of the subordinated convertible notes (the Notes) that is attributable to currency exchange rate movements is not an allowable deduction to Groupco, to the extent that the Notes were used to recapitalise offshore subsidiaries?

Answer

Yes

Question 2

Will subsection 230-30(2) of the ITAA 1997 apply such that any gain Groupco makes on the face value of the Notes that is attributable to currency exchange rate movements is NANE income of Groupco, to the extent that the Notes were used to recapitalise offshore subsidiaries?

Answer

Yes

Question 3

Are borrowing costs in relation to the issue of the Notes deductible under section 230-15 of the ITAA 1997?

Answer

Yes

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.

1. Groupco comprises the head office in Australia, and global divisions.

2. Groupco is a Part X Australian resident company and is the head entity of the Groupco income tax consolidated group (Groupco TCG).

3. Forco is a foreign resident and a wholly owned subsidiary of a member of the Groupco TCG.

4. Havco is a foreign resident and a wholly-owned subsidiary of a member of the Groupco TCG.

5. Previously, Groupco borrowed funds from Havco under a 6 month, at call, inter-company loan facility (Loan). The Loan was used to recapitalise Forco. It was determined that 100% of gains or losses on the Loan that were attributable to currency exchange rate movements were made in gaining or producing NANE income.

6. In this transaction, Groupco raised funds by issuing two tier 2 subordinated convertible notes each of the same value (the Notes).

7. The term sheet for the Notes provides details of:

• Issuer

• Security

• S&P Treatment

• Regulatory Capital Treatment

• Issue Size

• Issue Date

• Maturity Date

• Call Date

• Upfront Fee

• Interest:

• Interest is paid based on a floating rate

• Scheduled to be paid quarterly in arrears (subject to Issuer Deferral)

• If deferred, interest is cumulative

• Interest Rate = LIBOR + Margin

• Conversion: At the option of the Note holder

• Conversion Number: In accordance with a formula

• Maximum Conversion Number: In accordance with a formula

• Early Conversion: At the option of the Note holder subject to conditions

• Transfer Restriction:

• Redemption

• Maturity: Issuer must Redeem all of the Note for Face Value and accrued interest on the Maturity Date

• Early Redemption: Issuer may Redeem all but not some of the Note for Face Value and accrued interest on the Call Date subject to conditions

8. Groupco advise the Notes were issued to raise funds for the following purposes:

i. To refinance debt. The character of the debt being refinanced was:

a. a portion, x%, financed NANE income producing activities

b. the remainder, (100 - x)%, financed general corporate activities that are productive of assessable income

ii. To partially repay the Loan that was wholly used for a NANE income producing purpose. The repayment was made on the date of issue of the Notes.

iii. To pay a commission fee to the investment banks responsible for arranging and marketing the issue of the Notes.

9. Groupco requires its divisions to remit a significant portion of their earned profits each year in order to support funding the ultimate dividend to external shareholders.

10. Non-portfolio dividends are paid by Groupco's foreign subsidiaries to Groupco.

11. In previous years Groupco received non-portfolio dividends from both Forco and Havco.

Assumption

The Notes issue:

• is a debt interest for the purposes of Subdivision 974-B of the ITAA 1997, and

• is a financial arrangement for the purposes of section 230-45 of the ITAA 1997.

Relevant legislative provisions

Income Tax Assessment Act 1936 Section 6,

Income Tax Assessment Act 1936 Section 23AJ,

Income Tax Assessment Act 1936 Former subsection 51(1),

Income Tax Assessment Act 1936 Part IVA,

Income Tax Assessment Act 1936 Section 317,

Income Tax Assessment Act 1936 Section 334A,

Income Tax Assessment Act 1936 Paragraph 336(c),

Income Tax Assessment Act 1997 Subsection 8–1(1),

Income Tax Assessment Act 1997 Paragraph 8–1(2)(c),

Income Tax Assessment Act 1997 Division 230,

Income Tax Assessment Act 1997 Section 230-15,

Income Tax Assessment Act 1997 Subsection 230-15(1),

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

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

Income Tax Assessment Act 1997 Paragraph 230-15(3)(d),

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

Income Tax Assessment Act 1997 Paragraph 230-30(2)(b),

Income Tax Assessment Act 1997 Subsection 230-30(3),

Income Tax Assessment Act 1997 Paragraph 230-30(3)(b),

Income Tax Assessment Act 1997 Section 230-45,

Income Tax Assessment Act 1997 Subsection 230-45(1),

Income Tax Assessment Act 1997 Subdivision 230-H,

Income Tax Assessment Act 1997 Paragraph 820–40(1)(a),

Income Tax Assessment Act 1997 Subparagraph 820–40(1)(a)(ii),

Income Tax Assessment Act 1997 Paragraph 820–40(3)(b),

Income Tax Assessment Act 1997 Subparagraph 820-40(3)(b)(ii) and

Income Tax Assessment Act 1997 Subsection 995–1(1).

Does Part IVA apply to this ruling?

Part IVA of the Income Tax Assessment Act 1936 is a general anti-avoidance rule that can apply in certain circumstances if you or another taxpayer obtains a tax benefit in connection with an arrangement and it can be concluded that the arrangement, or any part of it, was entered into or carried out by any person for the dominant purpose of enabling a tax benefit to be obtained. If Part IVA applies the tax benefit can be cancelled, for example, by disallowing a deduction that was otherwise allowable.

We have not fully considered the application of Part IVA to the arrangement you asked us to rule on, or to an associated or wider arrangement of which that arrangement is part.

If you want us to rule on whether Part IVA applies we will first need to obtain and consider all the facts about the arrangement which are relevant to determining whether Part IVA may apply.

For more information on Part IVA, go to our website www.ato.gov.au and enter 'part iva general' in the search box on the top right of the page, then select: 'Part IVA: the general anti-avoidance rule for income tax'.

Reasons for decision

While these reasons are not part of the private ruling, we provide them to help you to understand how we reached our decision.

Question 1

Summary

Yes. Subsection 230-30(3) of the ITAA 1997 will apply such that any loss Groupco makes on the face value of the subordinated convertible notes issued (the Notes) that is attributable to currency exchange rate movements is not an allowable deduction to Groupco, to the extent that the Notes were used to recapitalise offshore subsidiaries.

Question 2

Summary

Yes. Subsection 230-30(2) of the ITAA 1997 will apply such that any gain Groupco makes on the face value of the Notes that is attributable to currency exchange rate movements is NANE income of Groupco, to the extent that the Notes were used to recapitalise offshore subsidiaries.

Detailed reasoning

Note: All legislative references are to the ITAA 1997 unless stated otherwise.

Division 230 deals with the income tax treatment of financial arrangements that began on or after 1 July 2010. Section 230-45 provides a definition of the term 'financial arrangement'.

Division 230 does not apply to all financial arrangements. The exceptions are dealt with in Subdivision 230-H. None of the exceptions in Subdivision 230-H apply to the present case.

The Notes issue is, by assumption, a debt interest and a financial arrangement for the purpose of section 230-45.

If Division 230 applies to gains or losses from a financial arrangement, the arrangement is called a 'Division 230 financial arrangement'.

Generally, under Division 230 a gain you make from a financial arrangement is included in your assessable income (subsection 230-15(1)). A loss you make from a financial arrangement is deductible to the extent that you make the loss in gaining or producing your assessable income, or you necessarily make it in carrying on a business for the purpose of gaining or producing assessable income (subsection 230-15(2)).

The tax treatment of gains and losses related to NANE income are exceptions to this general approach of gains and losses being either assessable or deductible.

Subsection 230-30(3) provides that a loss made from a financial arrangement is not an allowable deduction under any provision of the income tax law other than subsection 230-15(3) to the extent it is made in gaining or producing NANE income.

Subsection 230-15(3) permits an Australian entity to deduct a loss that it makes from a financial arrangement that is made in deriving NANE income from a foreign source under section 23AJ of the ITAA 1936 to the extent (if any) that the loss is a cost in relation to a debt interest issued by the taxpayer that is covered by paragraph 820-40(1)(a). That paragraph states:

(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

…

However, paragraph 820-40(3)(b) provides that where a loss that would be a cost covered by subparagraph 820-40(1)(a)(ii) except for the fact that the relevant financial benefits are measured in a foreign currency and the loss is due solely to changes in the rate of converting that foreign currency into Australian currency, the cost is not covered by paragraph 820-40(1)(a).

'Australian entity' is a defined term that includes an entity (other than a partnership or a trust) that is a 'Part X Australian resident' (see subsection 995-1(1) and sections 317 and paragraph 336(c) of the ITAA 1936).

A Part X Australian resident is a resident within the meaning of section 6 of the ITAA 1936 that is not taken under a tie-breaker provision in a double tax agreement in force in respect of a foreign country to be a resident solely of that country (see section 317 of the ITAA 1936).

Section 23AJ of the ITAA 1936 provides:

A non-portfolio dividend (as defined in section 317 [of the ITAA 1936]) paid to a company is not assessable income, and is not exempt income, of the company if:

(a) the company is an Australian resident and does not receive the dividend in the capacity of a trustee; and

(b) the company that paid the dividend is not a Part X Australian resident (as defined in that section).

A non-portfolio dividend means a dividend (other than an eligible finance share dividend or a widely distributed finance share dividend) paid to a company where that company has a voting interest, within the meaning of section 334A of the ITAA 1936, amounting to at least 10% of the voting power, within the meaning of that section, in the company paying the dividend.

Subsection 230-30(2) provides that, despite section 230-15, a gain made from a financial arrangement will be NANE income to the extent that, if the gain had been a loss instead (a 'hypothetical loss'), the hypothetical loss would have been made in gaining or producing NANE income.

Taxation Ruling TR 2012/3 Income tax: taxation of financial arrangements - application of subsections 230-30(2) and 230-30(3) of the Income Tax Assessment Act 1997 to gains and losses relating to exempt income or non-assessable non-exempt income (TR 2012/3) explains the principles that apply in deciding whether or not a loss you make, or hypothetical loss you would have made, from a financial arrangement is made in gaining or producing exempt income or NANE income for the purposes of subsections 230-30(2) and 230-30(3).

The principles relevant to the present case are set out in paragraphs 9 - 14 of
TR 2012/3 and include:

• As with subsection 8-1(1) and paragraph 8-1(2)(c), the words 'in gaining or producing' require an examination of whether or not there is a sufficient connection between the identified loss and an income producing activity. Whether a sufficient connection exists will depend on the nature of the loss and the degree of its connection with the activities by which the taxpayer is gaining producing the relevant income.

• The words 'in gaining or producing' have a wide application (Amalgamated Zinc (De Bavay's) Ltd v. Federal Commissioner of Taxation (1935) 54 CLR 295 at 309; [1935] HCA 81).

• A loss is made in gaining or producing exempt income or NANE income if the loss is incidental and relevant to the exempt income or NANE income producing activity of the taxpayer (Ronpibon Tin NL and Tongkah Compound NL v. Federal Commissioner of Taxation (1949) 78 CLR 47; [1949] HCA 15 (Ronpibon Tin)).

• Incidence and relevance requires an examination of the connection that the making of the loss has with the operations which more directly gain or produce the exempt income or NANE income (Charles Moore & Co (WA) Pty Ltd v. Federal commissioner of Taxation (1956) 95 CLR 344 at 351; [1956] HCA 77 at paragraph 7).

• Whether a loss has a sufficient connection to the gaining or producing of exempt income or NANE income is a question of fact and circumstances.

Paragraphs 132 - 139 of TR 2012/3 discuss the connection that a foreign exchange loss (you make or would have made in relation to borrowings used to acquire a NANE income producing asset) has with the production of NANE income.

Paragraph 133 of TR 2012/3 states:

A foreign exchange loss is akin to a cost of borrowing, or of obtaining and securing borrowed funds for use in the business. This characterisation of the loss being a cost of borrowing and having regard to the wide nature of the nexus test (assuming there is no issue of the expenditure being too soon or post-derivation) leads to the conclusion that such a loss is made in gaining or producing NANE income.

Paragraph 9 of Taxation Ruling IT 2606 Income tax: deduction for interest on borrowings to fund share acquisitions (IT 2606) similarly states:

As a general rule, interest on money borrowed to acquire shares will be deductible under the first limb of subsection 51(1) where it is expected that dividends or other assessable income will be derived from the investment. Such an expectation will usually exist as shares by their very nature are inherently capable of generating dividends, whether in the short or long term. However, such an expectation must be reasonable and not a mere theoretical possibility; there must be a prospect of dividends or other assessable income being received.

Paragraph 20 of IT 2606 refers to the evidence before the Full Federal Court in FC of T v Total Holdings (Australia) Pty Ltd 79 ATC 4279 (Total Holdings). Paragraph 20 states:

The parent had a policy of requiring dividends to be remitted and it had sufficient control over the subsidiary to ensure that this policy was followed. This was sufficient evidence to show an expectation of income by the parent at some time in the future.

In 'Example 3 - borrowing for investment in shares' in TR 2012/3, a resident company borrows to acquire shares in a foreign subsidiary, and on repayment of the loan makes a foreign exchange gain. There was a reasonable expectation that the shares in the foreign subsidiary would pay dividends that would satisfy section 23AJ of the ITAA 1936. Example 3 at paragraph 35 provides:

If the gain that arises in relation to the repayment of the loan principal had been a loss instead, this hypothetical loss would have been made in gaining or producing NANE income. The interest and the currency exchange rate movement on the principal are together a cost of financing. Consequently, the gain is NANE income under subsection 230-30(2).

Example 3 concludes that:

If an actual loss arose in these circumstances instead of the gain, such a loss would not be allowable as a deduction by virtue of subsection 230-30(3).

The explanation in paragraph 70 of TR 2012/3 is also relevant. Paragraph 70 states:

…a loss made in relation to the satisfaction of an obligation to pay interest on a loan, the funds from which were used to acquire an asset that produces NANE income, has a nexus with the production of NANE income.

Taxation Ruling TR 95/25 Income tax: deductions for interest under section 8-1 of the Income Tax Assessment Act 1997 following FC of T v. Roberts; FC of T v. Smith outlines the implications flowing from the decision of the Full Federal Court in FC of T v. Roberts; FC of T v. Smith 92 ATC 4380; (1992) 23 ATR 494 (Roberts and Smith). These implications apply to companies, amongst other entities.

The issue in Roberts and Smith was whether interest incurred by a general law partnership in respect of borrowings used to repay partners' capital was deductible under former subsection 51(1) of the ITAA 1936.

In the course of his judgement, Justice Hill stated (ATC at 4388; ATR at 504):

The funds to be withdrawn in such a case [where a partner calls up an amount owing as undrawn partnership distributions] were employed in the partnership business; the borrowing replaces those funds and the interest incurred on the borrowing will meet the statutory description of interest incurred in the gaining or production by the partnership of assessable income.

In principle, such a case is no different from the borrowing from one bank to repay working capital originally borrowed from another; the character of the refinancing takes on the same character as the original borrowing and gives to the interest incurred the character of a working expense.

As explained by paragraph 42 of TR 95/25:

Interest on a new loan will be deductible if the new loan is used to repay an existing loan which, at the time of the second borrowing, was being used in an assessable income producing activity or used in a business activity which is directed to the production of assessable income (Roberts and Smith ATC at 4388; ATR at 504).

Conversely, interest on a new loan will not be deductible if the new loan is used to repay an existing loan which, at the time of the second borrowing, was being used in a NANE income producing activity. The same principle applies to foreign exchange gains or losses made in respect of a borrowing because foreign exchange gains or losses made in respect of a borrowing are akin to interest paid on the borrowing, as explained by paragraph 133 of TR 2012/3.

Paragraphs 15 and 16 of TR 2012/3 discuss the issue of apportionment in relation to a loss (an actual loss) or a gain (by reference to a hypothetical loss). The expression 'to the extent that' in subsection 230-30(3) makes it clear that apportionment is required where a loss:

• has a connection with an activity that produces both assessable income, and exempt income or NANE income; or

• has a connection with more than one activity, one of which produces assessable income and at least one other which produces exempt income or NANE income.

An appropriate method of apportionment is a question of fact in each case. The method to be adopted in any particular case must be 'fair and reasonable' in all the circumstances ( Ronpibon Tin; Adelaide Racing Club Inc v. Federal Commissioner of Taxation (1964) 114 CLR 517 at 526; [1964] HCA 57 at paragraph 16). There may be more than one fair and reasonable basis for apportionment. The Commissioner will accept the method adopted provided it is fair and reasonable and applied consistently.

Application to the facts

Viewed as a cost of borrowing, or obtaining and securing the use of borrowed funds, the conclusion that a foreign exchange gain or loss from currency exchange rate movements is made in the course of gaining or producing NANE income relies on there being a sufficient nexus or connection between that gain or loss and the operations or activities that more directly gain or produce NANE income.

In the present case, the taxpayer has advised that funds raised from the Notes issue were used as follows:

i. To refinance debt that was utilised as follows:

a. x% financed the recapitalisation of a foreign subsidiary which is productive of NANE income because its shares generate (and are reasonably expected to generate) dividends for Groupco which are NANE income under section 23AJ of the ITAA 1936

b. (100 - x)% financed general corporate activities that are productive of assessable income;

ii. To partially repay the Loan which was used to finance the recapitalisation of its foreign subsidiary, Forco, which is productive of NANE income because its shares generate (and are reasonably expected to generate) dividends for Groupco which are NANE income under section 23AJ of the ITAA 1936; and

iii. To pay fees to the bankers involved in arranging and marketing the Notes. This was a necessary expense associated with the raising of the funds.

In the context of the characterisation of a new Notes issue entered into as part of a refinancing ('the refinancing principle'), the character of the refinancing takes on the same character as the original borrowing. In accordance with the refinancing principle, to the extent the Loan and previous debt were connected to the production of NANE income, the Notes and repayment of the Loan (the subject of this ruling) will have the same purpose.

As discussed, the expression 'to the extent that' in subsections 230-30(2) and 230-30(3) makes it clear that apportionment is required in relation to any gain or loss where it:

• has a connection with an activity that produces both assessable income and NANE income, or

• has a connection with more than one activity, one of which produces assessable income and at least one other which produces NANE income.

Foreign exchange losses in respect of the debt being refinanced fell within the second bullet point as they had a connection with more than one activity. They had a connection with the acquisition and holding of share capital in Forco, the acquisition and holding of shares in another foreign subsidiary, and general corporate activities. The first two activities were reasonably expected to produce NANE income. The general corporate activities wholly produce assessable income. Consequently, in respect of the debt being refinanced, apportionment of foreign exchange losses between NANE income and assessable income was required.

It was determined that x% of any foreign exchange gains or losses on the debt being refinanced had a connection with the production of NANE income. As a resultx% of any gains or losses made as a result of currency exchange rate movements in respect of the face value of the Notes issue that is used to refinance that debt has a connection with the production of NANE income.

Accordingly, x% of any losses made as a result of currency exchange rate movements on the amount received from issuing the Notes and utilised to refinance the debt plus x% of any losses made as a result of currency exchange rate movements on the amount of the fee for the arrangement and management of the Note are not allowable as a deduction to Groupco under any provision of the Act (paragraph 230-30(3)(b)).

Similarly, x% of any gains, if they had been losses made as a result of currency exchange rate movements on the amount received from issuing the Notes and utilised to refinance the debt, plus x% of any gains, if they had been losses, made as a result of currency exchange movements on the fee for the arrangement and management of the Note would have been made in the production of NANE income by Groupco and is therefore NANE income under paragraph 230-30(2)(b).

Previously it was determined that all of the proceeds of the Loan from Havco to Groupco, used to recapitalise Groupco's foreign subsidiary, was reasonably expected to produce NANE income in the form of 23AJ dividends. This meant that any gains or losses made as a result of currency exchange rate movements in respect of the Loan also had a connection with the production of NANE income.

Accordingly, any losses made as a result of currency exchange rate movements on the amount received from issuing the Notes and utilised to partially repay the Loan plus any losses made as a result of currency exchange rate movements on the fee for the arrangement and management of the Note are not allowable as a deduction to Groupco under any provision of the Act (paragraph 230-0(3)(b)).

Similarly, any gains, if they had been losses, made as a result of currency exchange rate movements on the amount received from issuing the Notes and utilised to partially repay the Loan plus any gains, if they had been losses, made as a result of currency exchange rate movements on the fee for the arrangement and management of the Note would have been made in the production of NANE income by Groupco and are therefore NANE income under paragraph 230-30(2)(b).

On these facts, it is considered that there would be a sufficient nexus between any gains or losses arising on the face value of the Notes that are attributable to currency exchange rate movements and the generation of NANE dividend income from the recapitalisation of foreign subsidiaries. Accordingly, any losses from the financial arrangement are not allowable as a deduction to Groupco under any provision of the Act (paragraph 230-30(3)(b)).

Similarly, any gains, if they had been losses, arising on the face value of the Notes that are attributable to currency exchange rate movements would have been made in gaining or producing NANE income by Groupco and are therefore NANE income under paragraph 230-30(2)(b).

For completeness, please note the requirements of subsection 230-15(3) have not been met in this case. Specifically, paragraph 230-15(3)(d) requires that the loss be a cost in relation to a debt interest that is covered by paragraph 820-40(1)(a). Prima facie, the cost (in this instance being the loss on the face value of the Notes that is attributable to currency exchange rate movements) in relation to the Notes issue meets subparagraph 820-40(1)(a)(ii). However, that provision is qualified by subparagraph 820-40(3)(b)(ii) which states that, where benefits are measured in a foreign currency and the losses have arisen only because of changes in the rate of converting that foreign currency, those amounts are not covered by paragraph 820-40(1)(a).

Therefore, as this cost in relation to the arrangement is not covered by paragraph 820-40(1)(a), the requirement in paragraph 230-15(3)(d) is not met, and the loss on the face value of the Notes that is attributable to currency exchange rate movements, made under the financial arrangement cannot be deducted.

Question 3

Summary

Yes. Borrowing costs in relation to the Notes issue are deductible under section 230-15 of the ITAA 1997.

Detailed reasoning

The relevant provisions to be considered are subsections 230-15(2) and 230-15(3) which provide:

Losses

230-15(2)

You can deduct a loss you make from a *financial arrangement, but only to the extent that:

(a) you make it in gaining or producing your assessable income; or

(b) you necessarily make it in carrying on a *business for the purpose of gaining or producing your assessable income.

Note: This Division does not apply to losses that are subject to exceptions under Subdivision 230-H.

230-15(3)

You can also deduct a loss you make from a *financial arrangement if:

(a) you are an *Australian entity; and

(b) you make the loss in deriving income from a foreign source; and

(c) the income is *non-assessable non-exempt income under section 23AI, 23AJ or 23AK of the Income Tax Assessment Act 1936; and

(d) the loss is, in whole or in part, a cost in relation to a *debt interest you issue that is covered by paragraph 820-40(1)(a).

You can deduct the loss only to the extent to which it is a cost in relation to a *debt interest you issue that is covered by paragraph 820-40(1)(a).

Note: This Division does not apply to losses that are subject to exceptions under Subdivision 230-H.

As discussed, the Notes issue is a financial arrangement for the purposes of section 230-45.

The exceptions under Subdivision 230-H do not apply in this instance.

The Notes issue comprised two notes. The fee paid to the investment bankers responsible for arranging and marketing the Notes issue was 2% of the issue size.

The fee paid to the bankers responsible for arranging and marketing the Notes issue is a loss made from a financial arrangement. The issue is whether that loss is deductible under subsections 230-15(2) and/or 230-15(3).

As discussed, in the context of the characterisation of a new Notes issue entered into as part of a refinancing ('the refinancing principle'), the character of the refinancing takes on the same character as the original borrowing. This characterisation flows through to the costs associated with the Notes issue, which means that the original apportionment of each Note issued applies to the fee per Note. Hence, as:

• x% of the amount used to refinance debt was connected to the production of NANE income, and (100 - x)% of this sum was connected to the production of assessable income, and

• all of the amount used to partially repay the Loan from Havco to Groupco was connected to the production of NANE income

then,

• x% of the fee for one Note was connected to the production of NANE income and (100 - x)% of this sum was connected to the production of assessable income, and

• all of the fee for the other Note was connected to the production of NANE income.

Therefore:

(100 - x)% of the fee for one Note is deductible under subsection 230-15(2) as it is:

• a loss from a financial arrangement, and

• made in gaining or producing assessable income or necessarily made in carrying on a business for the purpose of gaining or producing assessable income; and

x% of the fee for one Note and all of the fee for the other Note is deductible in accordance with subsection 230-15(3) as:

• the taxpayer is an Australian entity, and

• the taxpayer made the loss in deriving income from a foreign source, and

• the income is NANE under section 23AJ of the ITAA 1936, and

• the loss is in whole or part a cost in relation to a debt interest the taxpayer issues that is covered by paragraph 820-40(1)(a).

That is, the whole of the borrowing costs, being the fee paid to the bankers responsible for arranging and marketing the Notes issue, is deductible under either subsection (2) or (3) of section 230-15.