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Edited version of your written advice
Authorisation Number: 1012903666071
Date of advice: 13 November 2015
Ruling
Subject: Thin Capitalisation - meaning of 'on-lent amount'
Question
Does paragraph (a) of the definition of 'on-lent amount' in section 995-1 of the ITAA 1997 encompass a 'debt interest' (as that term is defined in section 995-1 by reference to Division 974 of the ITAA 1997) that is on issue and that is held by the Company, irrespective of whether the debt interest was originally issued to the Company or was assigned to, or otherwise acquired by the Company, such that the value of the debt interest is included in Step 6 of the method statement set out in subsection 820-100(3) of the ITAA 1997?
Answer
Yes
This ruling applies for the following period:
1 July 2015 to 30 June 2016
The scheme commences on:
During the income year
Relevant facts and circumstances
The taxpayer Company is an Australian resident company and the head company of a tax consolidated group. The Company group operates internationally including through 100% non-resident subsidiaries.
The Company, as head company of the tax consolidated group, is an 'outward investor (financial)' entity for the purposes of the thin capitalisation rules contained in Division 820 of the ITAA 1997.
The Company holds Primary and Secondary debt interests through subsidiary members of the tax consolidated group. Primary debt interests refer to debt interests acquired directly from the issuer. Secondary debt interests refer to debt interests acquired from others, and the entity that originally issued the debt interests does not participate in the transaction.
Relevant legislative provisions
Income Tax Assessment Act 1997 Subsection 820-100(3)
Income Tax Assessment Act 1997 Subsection 995-1(1) 'on-lent amount' paragraph (a)
Reasons for decision
The term 'on-lent amount' is asterisked in section 820-100(3) and is defined in section 995-1 of the ITAA 1997 to mean, relevantly to this ruling:
on-lent amount, of an entity and at a particular time, means the value, as at that time, of:
(a) all the assets of the entity that are comprised by *debt interests issued by other entities;
…
In turn, the term 'debt interest' in paragraph (a) of the definition of 'on-lent amount' is also asterisked and is defined in section 995-1 to have the meaning given by Subdivision 974-B of the ITAA 1997.
The application for the private ruling is not about whether certain assets of the Company qualify as 'debt interest' within the meaning of Subdivision 974-B. The application is about whether assets of the Company that otherwise satisfy the meaning of 'debt interest' under Subdivision 974-B, need to have also been originally issued to the Company to be included in the paragraph (a) meaning of 'on-lent amount', or whether the Company could have acquired the debt interest, for example via a secondary market, and still be included in the paragraph (a) meaning of 'on-lent amount'.
The Commissioner accepts the latter, that paragraph (a) of the definition of "on-lent amount" in section 995-1 of the ITAA 1997 encompasses a 'debt interest' (as that term is defined in section 995-1 of the ITAA 1997 by reference to Division 974 of the ITAA 1997) that is on issue and that is held by the Company, irrespective of whether the debt interest was originally issued to the Company or was assigned to, or otherwise acquired by the Company, such that the value of the debt interest is included in Step 6 of the method statement set out in subsection 820-100(3) of the ITAA 1997.