Edited version of your written advice

Authorisation Number: 1013122591630

Date of advice: 11 November 2016

Ruling

Subject: Thin Capitalisation Exemption

Question 1

Does Entity X meet the conditions in subsection 820-39(3) of the Income Tax Assessment Act 1997 (ITAA 1997)?

Answer

Yes

Relevant facts and circumstances

Entity X was established as a Special Purpose Vehicle (SPE) in order to manage the risk of recovery of certain receivables that were either assumed or created by Entity X.

Entity X borrowed funds from Lenders pursuant to a Loan and used the funds to purchase the receivables from Entity S that are payable by Entity P as well as to make another loan.

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

The Loan is a debt interest for Australian income tax purposes. The value of the Loan is at least X0% of the receivables.

The Loan has a Maturity Date which is less than X0 years.

Evidence in support of Entity X meeting the relevant criteria

Entity X was established to satisfy a particular, internationally renowned, ratings agency's criteria.

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

Entity X will have at least one independent administrator on its Board who will not be inappropriately influenced by another transaction party.

Entity X is precluded from engaging in any dissolution, liquidation, consolidation, merger, or asset sale or the amendment of its constituent documents in accordance with certain transaction documents.

Entity X will ensure that it maintains its separateness from any other entity.

Entity X will display sound management by keeping proper books and records, conducting its business in Entity X's name only, carrying on and conducting its business in accordance with all applicable laws.

Any recourse will be limited to certain property specified in Entity X's finance documents and will be limited to transaction parties.

Relevant legislative provisions

Income Tax Assessment Act 1997 Section 820-39

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

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

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 (ITAA 1997) unless otherwise stated.

Detailed Reasoning

Subsection 820-39(3) states that 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 the 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 met for the requirements of subsection 820-39(3) to be satisfied.

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

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

As part of the arrangement, Entity X will assume some or all of the economic risks associated with the underlying receivables since Entity X's return is contingent on the recovery of the receivables. That is, at least part of the credit risk of the receivables will pass from Entity S to Entity X.

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

As the loans held in Entity X constitute debt interests for the purposes of the ITAA 1997, the paragraph 820-39(3)(b) requirement is satisfied as the total value of the loans will be at least half the value of Entity X's assets.

Conclusion

This requirement is satisfied as the Loan is a debt interest and the value of Entity X's debt interests is at least X0% of Entity X's assets. Therefore Entity X will at all times be predominantly funded by debt.

Paragraph 820-39(3)(c) Entity F is an insolvency-remote special purpose entity

Whether Entity X will satisfy the criteria of an internationally recognised rating agency is a conclusion of fact, which includes a consideration of criteria published by internationally recognised ratings agencies. Entity X was established to satisfy a particular, internationally renowned, ratings agency's criteria.

The requirement of meeting such Criteria can be met without a determination by a rating agency; subsection 820-39(4).

In the criteria, the rating agency sets out that a SPE will achieve insolvency remoteness by adopting some form of the characteristics identified in the criteria. Therefore, Entity X does not need to satisfy each criterion in order to be assessed as insolvency remote. The characteristics in the criteria for assessing insolvency remoteness are:

● Restrictions on objects and powers

● Debt Limitations

● Independent director

● No merger or reorganisation

● Non-petition language in contracts to which the SPE is a party, and

● Separateness.

We note the matters set out under the heading Evidence in support of Entity X meeting the relevant criteria set out in the Relevant facts and circumstances to which this Private Ruling applies.

Based on those matters, the Commissioner accepts that Entity X will meet the requirements of the criteria of an internationally recognised rating agency, which are applicable to Entity X's circumstances, and the requirements of paragraph 820-39(3)(c) will in turn be satisfied.

Conclusion

As each of the requirements set out in paragraphs 820-39(3)(a), (b) and (c) are present in the circumstances of Entity X, the conditions in subsection 820-39(3) are satisfied.