Edited version of your written advice

Authorisation Number: 1013026838567

Date of advice: 17 June 2016

Ruling

Subject: Funding arrangement

Question 1

Will Loan F issued by Entity H to Entity J in accordance with the facility agreement be treated as a debt interest pursuant to section 974-15 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Question 2

Will Loan G issued by Entity H to Entity J in accordance with the facility agreement be treated as a debt interest pursuant to section 974-15 of the ITAA 1997?

Answer

Yes

Question 3

Will the losses made by Entity H on Loan F be deductible to Entity H under subsection 230-15(2) of the ITAA 1997?

Answer

Yes

Question 4

Will the losses made by Entity H on Loan G be deductible to Entity H under subsection 230-15(2) of the ITAA 1997?

Answer

Yes

Question 5

Will the Commissioner make a determination pursuant to section 177F of the Income Tax Assessment Act 1936 (ITAA 1936) to Entity H in respect of the losses made on Loan F?

Answer

No

Question 6

Will the Commissioner make a determination pursuant to section 177F of the ITAA 1936 to Entity H in respect of the losses made on Loan G?

Answer

No 

Question 7

Will the Commissioner make a determination pursuant to subsection 204-30(3) of the ITAA 1997 in respect of Distribution P made by Entity H to Entity K and Entity L?

Answer

No

Question 8

Will the Commissioner make a determination pursuant to subsection 204-30(3) of the ITAA 1997 in respect of Distribution Q made by Entity H to Entity K and Entity L?

Answer

No

Relevant facts and circumstances

Entity H will borrow funds from Entity J to fund its capital growth and expenditure requirements.

Entity H makes Distribution P and Distribution Q to Entity K and Entity L from time-to-time, which enables Entity K and Entity L to provide funds to Entity J.

Entity J uses the funds received to provide Entity H with different types of loans from time-to-time under a facility agreement. Loan F and Loan G are loans made under an agreement that have different maturity dates of no longer than 10 years, and different terms.

Relevant legislative provisions

Income Tax Assessment Act 1997 subsection 204-30(1)

Income Tax Assessment Act 1997 subsection 204-30(3)

Income Tax Assessment Act 1997 subsection 204-30(6)

Income Tax Assessment Act 1997 subsection 230-15(2)

Income Tax Assessment Act 1997 subsection 230-45(1)

Income Tax Assessment Act 1997 subsection 230-45(2)

Income Tax Assessment Act 1997 subsection 230-55(4)

Income Tax Assessment Act 1997 subsection 974-15(1)

Income Tax Assessment Act 1997 subsection 974-20(1)

Income Tax Assessment Act 1997 subsection 974-35(1)

Income Tax Assessment Act 1997 subsection 974-70(2)

Income Tax Assessment Act 1997 subsection 974-80(1)

Income Tax Assessment Act 1997 subsection 974-80(2)

Income Tax Assessment Act 1997 subsection 974-130(1)

Income Tax Assessment Act 1997 section 974-155

Income Tax Assessment Act 1936 subsection 177A(1)

Income Tax Assessment Act 1936 subsection 177C(1)

Income Tax Assessment Act 1936 section 177CB

Income Tax Assessment Act 1936 subsection 177D(2)

Income Tax Assessment Act 1936 section 177F(1)

Reasons for decision

Legislative references are to provisions of the Income Tax Assessment Act 1997 (ITAA 1997) unless specified otherwise.

Question 1

Summary

Loan F issued by Entity H to Entity J in accordance with the facility agreement will be treated as a debt interest pursuant to section 974-15.

Detailed reasoning

A scheme gives rise to a debt interest in an entity under subsection 974-15(1) if, when the scheme comes into existence, it satisfies the debt test in subsection 974-20(1) in relation to the entity, and the scheme:

• does not, together with one or more other related schemes, constitute a larger interest that is an equity interest when the second (if together with one more) or the last (if together with two or more) schemes are entered into. Related schemes are discussed below

• is not materially changed such that it becomes an equity interest from the date of change pursuant to section 974-110, and

• section 974-80 does not operate to treat the scheme as an equity interest. Section 974-80 is discussed below.

If an interest satisfies both the debt test and the equity test, debt interest treatment prevails; paragraph 974-70(1)(b) and subsection 974-5(4).

The debt test

As stated above, subsection 974-15(1) provides that a scheme gives rise to a debt interest in an entity if the scheme satisfies the debt test in subsection 974-20(1) when the scheme comes into existence.

Subsection 974-20(1) states that:

A scheme satisfies the debt test in this subsection in relation to an entity if:

(a) the scheme is a *financing arrangement for the entity; and

(b) the entity, or a *connected entity of the entity, receives, or will receive, a *financial benefit or benefits under the scheme; and

(c) the entity has, or the entity and a connected entity of the entity each has, an *effectively non-contingent obligation under the scheme to provide a financial benefit or benefits to one or more entities after the time when:

(i) the financial benefit referred to in paragraph (b) is received if there is only one; or

(ii) the first of the financial benefits referred to in paragraph (b) is received if there are more than one; and

(d) it is substantially more likely than not that the value provided (worked out under subsection (2)) will be at least equal to the value received (worked out under subsection (3)); and

(e) the value provided (worked out under subsection (2)) and the value received (worked out under subsection (3) are not both nil.

The scheme does not need to satisfy paragraph (a) if the entity is a company and the interest arising from the scheme is an interest covered by item 1 of the table in subsection 974-75(1) (interest as a member or stockholder of the company).

Note: Section 974-30 tells you when a financial benefit is taken to be provided to an entity.

Each of the requirements in paragraphs 974-20(1)(a) to (e) must be met for a scheme to satisfy the debt test. Each paragraph is considered in turn below.

Paragraph 974-20(1)(a) - scheme is a financing arrangement for Entity H

The relevant 'scheme' for the purposes of subsection 974-15(1) which draws on the definition in section 995-1 of 'any arrangement' is each Loan F that Entity H issues to Entity J pursuant to the facility agreement. See ATO Interpretative Decision ATO ID 2006/230: Income Tax: Revolving Credit Facility: Facility Agreement - debt interest.

Each Loan F that Entity H issues will not give rise to an 'interest' covered by item 1 of the table in subsection 974-75(1) which is concerned with:

… [a]n interest in the company as a member or stockholder of the company …

for the purposes of the words which follow paragraph 974-20(1)(e) which commence:

The scheme does not need to satisfy …

Therefore, the scheme that gives rise to each Loan F must satisfy the paragraph 974-20(1)(a) requirement.

Pursuant to subsection 974-130(1), a scheme is a financing arrangement for an entity if it is entered into or undertaken:

(a) to raise finance for the entity (or a *connected entity of the entity); or

…

Subsection 974-130(2) states that examples of schemes that are generally entered into or undertaken to raise finance are:

(a) a bill of exchange;
…

Note: Paragraph (a) is likely to be relevant for debt interests, ...

The scheme giving rise to each Loan F will be entered into or undertaken to raise finance for Entity H and is, accordingly, a financing arrangement in accordance with paragraph 974-130(1)(a).

Therefore, a scheme giving rise to each Loan F will satisfy the paragraph 974-20(1)(a) requirement.

Paragraph 974-20(1)(b) - receipt of financial benefits

Under the terms of the facility agreement, Entity H will make each Loan F of a minimum amount (together with any Loan G amounts) to Entity J and not exceeding (again together with any Loan G amounts) the facility agreement maximum limit.

Entity H will receive financial benefits when it issues each Loan F.

Therefore, the scheme giving rise to each Loan F will satisfy the paragraph 974-20(1)(b) requirement.

Paragraph 974-20(1)(c) - effectively non-contingent obligation to provide financial benefits

Obligation to provide principal and interest

Under the terms of the facility agreement, Entity H must repay the principal amount of each Loan F, including all outstanding accrued interest no later than the date which is no later than 10 years from when it issued the Loan F.

Therefore, Entity H has an effectively non-contingent obligation to repay the principal and provide interest including any accrued or outstanding interest at maturity. Accordingly, Entity H has an effectively non-contingent obligation to provide financial benefits under each Loan F.

Therefore the scheme giving rise to each Loan F will satisfy the paragraph 974-20(1)(c) requirement.

Paragraph 974-20(1)(d) - financial benefits provided will equal or exceed those received

Under paragraph 974-20(1)(d) and subsections 974-20(2) and (3), it has to be substantially more likely than not that the value of all the financial benefits that Entity H will provide under the scheme will be at least equal to the value of all the financial benefits that Entity H will receive under the scheme.

As the performance period of each Loan F is no later than 10 years from when it issued the Loan F, the value of the financial benefits are worked out in nominal terms; subparagraph 974-35(1)(a)(i).

Accordingly, the financial benefits that Entity H is required to pay on each Loan F will, in nominal terms, at least equal the financial benefits that Entity H will receive under each Loan F.  

Therefore the scheme giving rise to each Loan F will satisfy the paragraph 974-20(1)(d) requirement.

Paragraph 974-20(1)(e) - financial benefits provided and received are not both nil

Entity H will issue each Loan F (together with any Loan G amounts) of a minimum amount and not exceeding the facility agreement maximum limit. On issuing each Loan F, Entity H has an obligation to provide financial benefits of at least the principal amount of the Loan F. Accordingly, the financial benefits that Entity H will provide and receive in respect of each Loan F are not both nil.

Therefore the scheme giving rise to each Loan F will satisfy the paragraph 974-20(1)(e) requirement.

Debt characterisation

As each of the requirements in paragraphs 974-20(1)(a) to (e) are met in respect of each Loan F, each Loan F will give rise to a debt interest in Entity H.

So that each Loan F is not otherwise treated as an equity interest, we also consider the 'related schemes' provisions in subsection 974-70(2) and section 974-80 which are discussed in turn below.

Related schemes

Subsection 974-70(2) provides that:

Two or more related schemes (the constituent schemes) are taken together to give rise to an equity interest in a company if:

(a) the company enters into, participates in or causes another entity to enter into or

participate in the constituent schemes; and

(b) a scheme with the combined effect or operation of the constituent schemes (the

notional scheme) would give rise to an equity interest in the company under subsection (1) if the notional scheme came into existence when the last of the

constituent schemes came into existence; and

(c) it is reasonable to conclude that the company intended, or knew that a party to

the scheme or one of the schemes intended, the combined economic effects of

the constituent schemes to be the same as, or similar to, the economic effects

of an equity interest.

This is so whether or not the constituent schemes come into existence at the same time and even if none of the constituent schemes would individually give rise to that or any other equity interest.

Section 974-155 sets out the circumstances in which two or more schemes are treated as 'related schemes' for the purposes of subsections 974-70(2) and 974-15(2).

In the present case, each Loan F issued by Entity H and the membership interests in Entity H on which Distribution P is payable each constitute a scheme as defined in subsection 995-1(1).

The Commissioner considers that, given the broad definition of 'related schemes', each Loan F and the membership interests in Entity H may constitute 'related schemes' within the meaning of section 974-155.

The two related schemes will give rise to an equity interest in Entity H if each of the requirements in paragraphs 974-70(2)(a) to (c) are met.

Whether the schemes are related

Based on the Relevant facts and circumstances, at the time when the last scheme is entered into (each Loan F), the Commissioner considers that the parties did not intend, or did not know that another party to one or more of the schemes intended that the combined effects of the membership interests in Entity Hand each Loan F would have the effect of a larger interest that is an equity interest for the purposes of paragraph 974-70(2)(c).

Therefore, as one of the requirements of subsection 974-70(2) will not be present, it is not necessary to consider the application of paragraphs 974-70(2)(a) and (b), and the membership interests in Entity H and each Loan F will not constitute a larger interest that is an equity interest pursuant to this subsection.

Section 974-80

Subsection 974-80(1) states that section 974-80 operates when:

(a) an interest carries a right to a variable or fixed return from a company; and

(b) the interest is held by a connected entity of the company; and

(c) apart from this section, the interest would not be an equity interest in the company; and

(ca) the scheme that gives rise to the interest is a financing arrangement for the company; and

(d) there is a scheme, or a series of schemes, designed to operate so that the return to the connected entity is to be used to fund (directly or indirectly) a return to another person (the ultimate recipient).

Where all of the requirements of subsection 974-80(1) are satisfied, subsection 974-80(2) operates to treat the interest as an equity interest where one of the requirements in subsection 974-80(2) is satisfied.

It is arguable that all of the requirements of subsection 974-80(1) will be satisfied, other than paragraph 974-80(1)(d).

Paragraph 1.28 of the Supplementary Explanatory Memorandum to the New Business Tax system (Debt and Equity) Bill 2001 states:

The amendment of paragraph 974-80(1)(d) is a technical amendment that will ensure that the provision applies as intended, which is only in those cases where the scheme or schemes are deliberately designed so that the return to the connected entity is in turn used to fund either directly or indirectly a return to the ultimate recipient.

Having regard to the Relevant facts and circumstances, the Commissioner accepts that it cannot be concluded that the scheme is 'deliberately designed' to achieve such an outcome. See Taxation Determination TD 2015/10 Income tax: will paragraph 974-80(1)(d) of the Income Tax Assessment Act 1997 be satisfied merely because a company has issued a debt interest to a listed property trust within the same stapled property group?

As all of the requirements of subsection 974-80(1)(a) to (d) will not be present for each Loan F as the paragraph 974-80(1)(d) requirement will not be satisfied, subsection 974-80(1) will in turn not be satisfied. Accordingly, it is not necessary to consider the application of subsection 974-80(2).

Therefore, section 974-80 will not apply to treat each Loan F as an equity interest.

Conclusion

As each of the requirements in paragraphs 974-20(1)(a) to (e) are met in respect of each Loan F, the Loan F will give rise to a debt interest in Entity H.

Further, subsection 974-70(2) and section 974-80 will not apply to treat each Loan F as, or as part of a larger interest that is, an equity interest.

Question 2

Summary

Loan G issued by Entity H to Entity J in accordance with the facility agreement will be treated as a debt interest pursuant to section 974-15.

Detailed reasoning

In accordance with the Loan G terms, the Detailed reasoning provided above in Question 1 for each Loan F will also apply to each Loan G that Entity H issues to Entity J.

Each Loan G has a maturity date of no longer than 10 years of when Entity H issued the Loan G.

Conclusion

As each of the requirements in paragraphs 974-20(1)(a) to (e) are met in respect of each Loan G, a Loan G will be a debt interest in Entity H.

Further, the related schemes provisions and section 974-80 will not apply to 're-characterise' each Loan G as an equity interest.

Question 3

Summary

Losses made by Entity H on each Loan F will be deductible to Entity H under subsection 230-15(2).

Detailed reasoning

Division 230 applies to financial arrangements that Entity H starts to have on or after the start of its first income year that commenced on or after 1 July 2010 (sub-item 103(1) of Schedule 1 to the TOFA Act).

Subsection 230-15(2) provides that:

Losses

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.

…

Financial arrangement

An arrangement will be a financial arrangement if it satisfies the 'primary definition' of a financial arrangement under section 230-45 or the 'secondary definition' under section 230-50. Each Loan F issued by Entity H to Entity J will be a 'financial arrangement' under subsection 230-45(1).

Subsection 230-45(1) provides:

You have a financial arrangement if you have, under an *arrangement:

(a) a *cash settlable legal or equitable right to receive a *financial benefit; or

(b) a cash settlable legal or equitable obligation to provide a financial benefit; or

(c) a combination of one or more such rights and/or one or more such obligations;

unless:

(d) you also have under the arrangement one or more legal or equitable rights to receive something and/or one or more legal or equitable obligations to provide something; and

(e) for one or more of the rights and/or obligations covered by paragraph (d):

(i) the thing that you have the right to receive, or the obligation to provide, is not a financial benefit; or

(ii) the right or obligation is not cash settlable; and

(f) the one or more rights and/or obligations covered by paragraph (e) are not insignificant in comparison with the right, obligation or combination covered by paragraph (a), (b) or (c).

The right, obligation or combination covered by paragraph (a), (b) or (c) constitutes the financial arrangement.

An arrangement is broadly defined under section 995-1 to mean:

any arrangement, agreement, understanding, promise or undertaking whether expressed or implied, and whether or not enforceable (or intended to be enforceable) by legal proceedings.

Subsection 230-45(2) provides that a right to receive, or an obligation to provide, a financial benefit is cash settlable when:

(a) The benefit is money or a *money equivalent; or

…

Under each Loan F arrangement, Entity H will have legal or equitable rights to receive principal, and obligations to provide interest and principal, which are cash settlable financial benefits.

The rights and obligations under each Loan F are cash settlable rights to receive and obligations to provide financial benefits and the exclusions to the definition of a financial arrangement in paragraphs 230-45(1)(d) to (f) have no application. The exclusion rules in sections 230-450 and 230-455 have no application on the facts.

Therefore, each Loan F that Entity H starts to have on or after its first income year that commenced on or after 1 July 2010 will be a financial arrangement to which Division 230 will apply.

Separate arrangements

While each Loan F will be made pursuant to the facility agreement, the Commissioner considers that each Loan F constitutes a separate financial arrangement.

Section 230-55 modifies the broad notion of arrangement and provides guidance in subsection 230-55(4) as to which specific rights and obligations will make up the arrangement to be tested for the purposes of the Division.

Whether a number of rights and/or obligations constitute an arrangement, or constitute two or more separate arrangements is a question of fact and degree. The way various rights and obligations are combined under subsection 230-55(4) is an objective enquiry, the purpose of which is to identify the correct 'unit of taxation' upon which Division 230 applies. See Taxation Ruling TR 2012/4: Income Tax the operation of subsection 230-55(4) of the Income Tax Assessment Act 1997 (ITAA 1997) in determining what is an 'arrangement' for the purposes of the taxation of financial arrangements under Division 230 of the ITAA 1997.

It is considered having regard to each of the factors in subsection 230-55(4) and the facts provided, that each Loan F that comes into existence pursuant to the facility agreement is a separate arrangement for the purposes of Division 230.

Losses deductible

Entity H will use the funds obtained from each Loan F for to fund its capital growth and expenditure requirements. The Commissioner accepts that there will be a sufficient connection between the losses that Entity H will make on each Loan F and the assessable income that Entity H will gain or produce for the purposes of subsection 230-15(2). The losses will include interest payments that Entity H will make to Entity J on the outstanding balance of each Loan F.

Conclusion

Losses that Entity H made during the ruling period on each Loan F that Entity H started to hold in an income year that commenced on or after 1 July 2010, will constitute losses that Entity H is entitled to deduct pursuant to subsection 230-15(2).

Question 4

Summary

Losses made by Entity H on each Loan G will be deductible to Entity H under subsection 230-15(2).

Detailed reasoning

In accordance with the Loan G terms, the Detailed reasoning provided above in Question 3 for each Loan F will also apply to each Loan G that Entity H issues to Entity J.

Each Loan G has a maturity date of no longer than 10 years of when Entity H issued the Loan G.

Conclusion

Losses that Entity H will make during the ruling period on each Loan G that Entity H started to hold in an income year that commenced on or after 1 July 2010, will constitute losses that Entity H is entitled to deduct pursuant to subsection 230-15(2).

Question 5

Summary

The Commissioner will not make a determination pursuant to section 177F of the ITAA 1936 to Entity H in respect of the interest payments allowable as a deduction under subsection 230-15(2) on each Loan F.

Detailed reasoning

For section 177F of the ITAA 1936 to apply, the elements of scheme, tax benefit and purpose must be present. These elements are considered in turn below.

Scheme

Subsection 177A(1) of the ITAA 1936 defines the term 'scheme' to mean:

(a)  any agreement, arrangement, understanding, promise or undertaking, whether express or implied and whether or not enforceable, or intended to be enforceable, by legal proceedings; and

(b)  any scheme, plan, proposal, action, course of action or course of conduct.

The Commissioner considers the 'scheme' includes the following 'course of action':

• Entity H will pay a Distribution P to Entity K and Entity L

• Entity K and Entity L will provide the funds to Entity J, and

• Entity J will make a Loan F to Entity H.

Tax benefit

The Detailed reasoning proceeds on the basis that if the scheme had not been entered into or carried out, Entity H will not make a Distribution P and will not issue a Loan F.

Under this alternative, the tax benefit that might reasonably be expected to arise for Entity H pursuant to paragraph 177C(1)(b) of the ITAA 1936 is the deductions for any ToFA losses that Entity H will become entitled to in respect of each Loan F.

The Commissioner considers that in identifying whether a tax benefit that might reasonably be expected to arise for Entity H pursuant to paragraph 177C(1)(b) of the ITAA 1936, section 177CB of the ITAA 1936 would apply in determining if the alternative is a reasonable alternative to entry or carrying out the scheme - in respect of each execution of the scheme after section 177CB of the ITAA 1936 took effect.

Purpose

The Commissioner concludes that the requisite purpose of enabling a taxpayer to obtain a tax benefit arising from the above arrangement whereby a Loan F is issued by Entity H to Entity J is not present.

The requisite purpose where there are two or more purposes is the dominant purpose, being the prevailing or most influential purpose.

In reaching a conclusion that the scheme was entered into in order to enable a taxpayer to obtain a tax benefit, the Commissioner is required to have regard to eight matters set out in subsection 177D(2) of the ITAA 1936. The matters are:

(a) the manner in which the scheme was entered into or carried out;

(b) the form and substance of the scheme;

(c) the time at which the scheme was entered into and the length of the period during which the scheme was carried out;

(d) the result in relation to the operation of this Act that, but for this Part, would be achieved by the scheme;

(e) any change in the financial position of the relevant taxpayer that has resulted, will result, or may reasonably be expected to result, from the scheme;

(f) any change in the financial position of any person who has, or has had, any connection (whether of a business, family or other nature) with the relevant taxpayer, being a change that has resulted, will result or may reasonably be expected to result, from the scheme;

(g) any other consequence for the relevant taxpayer, or for any person referred to in paragraph (f), of the scheme having been entered into or carried out; and

(h) the nature of any connection (whether of a business, family or other nature) between the relevant taxpayer and any person referred to in paragraph (f).

These eight matters are considered in turn below.

(a) The manner in which the scheme was entered into or carried out

The facility which enables Entity H to issue one or more Loan Fs (each part of a 'scheme') was implemented in order to meet the ongoing funding requirements of various entities including Entity H.

Each Loan F may be made to Entity H by Entity J indirectly from a Distribution P that was made by Entity H to Entity K and Entity L.

Although external borrowings were considered, the facility whereby a Loan F is indirectly funded through a Distribution P addresses certain accounting outcomes.

(b) The form and substance of the scheme

The form and substance of the facility enables Entity H to issue one or more Loan F amounts (each part of a 'scheme') indirectly from a Distribution P made to Entity K and Entity L. The Loan F amount will fund the funding requirements of Entity H and its subsidiaries.

Although the parties are related, each Loan F is based on 'commercial terms' which adopt arms' length interest rates.

The Commissioner understands that the funding enables Entity H to optimise its capital structure and in doing so reduce its weighted average cost of capital.

(c) The time at which the scheme was entered into and the length of the period during which the scheme was carried out

The facility which enables one or more Loan F amounts (each part of a 'scheme') commenced several years ago.

Loan G amounts made indirectly from a Distribution Q are also available.

The facility is expected to continue into the future pursuant to the facility agreement. The maturity date for each Loan F is no longer than 10 years from when Entity H issued the loan.

Each Distribution P, the provision of funds to Entity J, and each Loan F takes place within a short space of time.

(d) The result in relation to the operation of the ITAA 1936 or the ITAA 1997 that, but for Part IVA, would be achieved by the scheme

Entity H will be entitled to deductions for any ToFA losses made pursuant to subsection 230-15(2) of the ITAA 1997 on each Loan F it issues to Entity J.

(e) Any change in the financial position of the relevant taxpayer that has resulted, or will result, or may reasonably be expected to result, from the scheme

Entity H's gearing will increase as a result of each Loan F it issues. Entity H will use each Loan F amount to fund its funding requirements. The Loan F amounts are not expected to breach thin capitalisation limits.

The Commissioner understands that the funding enables Entity H to optimise its capital structure and in doing so reduce its weighted average cost of capital.

(f) Any change in the financial position of any person who has, or has had any connection with the relevant taxpayer, being a change that has resulted, or will result, or may reasonably be expected to result, from the scheme

When a fully franked Distribution P is made, Entity K and Entity L will receive fully franked distributions which will increase their respective franking account balances.

Entity K and Entity L will also increase the size of their investment in Entity J which enables Entity J to provide a Loan F to Entity H. Interest income that is available to Entity J may fund a return that Entity J makes in turn to Entity K and Entity L.

Finally, in providing funds for Entity H's funding requirements, this is expected to increase the value of the membership interests that Entity K and Entity L hold in Entity H, along with earnings growth.

(g) Any other consequence for the relevant taxpayer or for any person referred to in paragraph (f) of the scheme being entered into or carried out

Entity K and Entity L as investors in Entity J may receive an increase in assessable returns from Entity J.

Entity K and Entity L as members of Entity H may increase their respective franking account balances.

(h) The nature of any connection between the relevant taxpayer and any person referred to in paragraph (f)

For paragraph 177D(2)(h) of the ITAA 1936, the relevant connections include that they are related entities of one another and with other entities.

Conclusion

Having regard to the eight matters set out in subsection 177D(2) of the ITAA 1936, the Commissioner accepts that it cannot be concluded that the requisite purpose on the part of Entity H or another person who entered into the scheme, or a part of the scheme, was to enable one or more persons to obtain a tax benefit.

Therefore, the Commissioner will not make a determination under section 177F of the ITAA 1936 to deny deductions for ToFA losses made by Entity H in respect of each Loan F.

Question 6

Summary

The Commissioner will not make a determination pursuant to section 177F of the ITAA 1936 to Entity H in respect of the interest payments allowable as a deduction under subsection 230-15(2) on each Loan G.

Detailed reasoning

The same reasons set out in the Detailed reasoning above for Question 5 for Loan F amounts will apply to each Loan G issued by Entity H to Entity K and Entity L that has a maturity date no longer than 10 years from when Entity H issued the loan, and which was indirectly funded from a Distribution Q made by Entity H to Entity K and Entity L.

Accordingly, the Commissioner will not make a determination under section 177F of the ITAA 1936 to deny deductions for ToFA losses made by Entity H in respect of each Loan G.

Question 7

Summary

The Commissioner will not make a determination pursuant to subsection 204-30(3) in respect of a Distribution P made by Entity H to Entity K and Entity L.

Detailed reasoning

Subsection 204-30(3) sets out the Commissioner's power to make a determination when an entity streams imputation benefits to certain members.

Subsection 204-30(1) provides that:

This section empowers the Commissioner to make determinations if an entity streams one or more distributions (or one or more distributions and the giving of other benefits), whether in a single franking period or in a number of franking periods, in such a way that:

(a)  an imputation benefit is, or apart from this section would be, received by a member of the entity as a result of the distribution or distributions; and

(b)  the member would derive a greater benefit from franking credits than another member of the entity; and

(c)  the other member of the entity will receive lesser imputation benefits, or will not receive any imputation benefits, whether or not the other member receives other benefits.

The member that derives the greater benefit from franking credits is the favoured member. The member that receives the lesser imputation benefits is the disadvantaged member.

Where each of the paragraphs in subsection 204-30(1) are present, the Commissioner may make a determination pursuant to subsection 204-30(3) which will result in a specified franking debit in the entity's franking account, a specified exempting debit in the entity's exempting account, or denying imputation benefits to favoured members in respect of the distribution.

Imputation benefit

Subsection 204-30(6) sets out when a member of an entity receives an imputation benefit.

Pursuant to paragraph 204-30(6)(c), Entity K and Entity L will receive imputation benefits when Entity H makes a fully franked Distribution P as:

… a franking credit would arise in the franking account of [Entity K and Entity L] as a result of the distribution …

Subsection 204-30(1)

Entity H will continue to pay a fully franked Distribution P to Entity K and Entity L in proportion to their membership interests. Therefore, the profile of any distributions payable on the membership interests will not differ to that of other distributions made on the membership interests.

The Commissioner accepts that where Entity H maintains the same profile of fully franked distributions to Entity L and Entity K in proportion to their membership interests, that neither entity will be a 'disadvantaged member' which receives lesser or no imputation benefits than another member.

Therefore, as the requirement of paragraph 204-30(1)(c) will not be satisfied and in turn all the requirements of subsection 204-30(1) will not be present, the Commissioner will not make a determination pursuant to subsection 204-30(3) in respect of a Distribution P that Entity H will make to Entity K and Entity L.

Question 8

Summary

The Commissioner will not make a determination pursuant to subsection 204-30(3) in relation to the payment of a Distribution Q to Entity K and Entity L.

Detailed reasoning

In accordance with the terms for a Distribution Q, the Detailed reasoning set out above in Question 7 for a Distribution P applies in the same way for a fully franked Distribution Q that Entity H will pay to Entity K and Entity L.

Therefore, as the requirement of paragraph 204-30(1)(c) will not be satisfied and in turn all the requirements of subsection 204-30(1) will not be present, the Commissioner will not make a determination pursuant to subsection 204-30(3) in respect of a Distribution Q that Entity H will make to Entity K and Entity L.