General class investors are deemed to have made a choice to use the third party debt test under subsection 820-46(5) if certain conditions are satisfied.
Broadly, if the entity that issues a debt interest chooses to use the third party debt test, then their 'associate entities' in the ‘obligor group’ in relation to the debt interest are all deemed to have chosen that test. A modified definition of associate entity applies for this purpose under subsection 820-48(2) of the ITAA 1997.
Additionally, entities that have entered into a cross staple arrangement together are also deemed to have chosen the third party debt test if one of those entities chooses to use that test.
If an entity is deemed to have made a choice to use the third party debt test, then the entity cannot make a choice to use the group ratio test, and any existing choice to use the group ratio test in relation to that income year is revoked and taken to never have been made.
Obligor group
An obligor group consists of the following entities:
- the borrower in relation to a debt interest
- each ‘obligor entity’, being an entity whose assets provide recourse to a creditor for payment of the borrower’s debt.
A creditor does not need to have recourse to all the assets of an entity for that entity to be an obligor entity. It is sufficient for recourse to be had to one or more assets of the entity.
However, where a creditor only has recourse to the assets of an entity that are membership interests in the borrower, then that entity will not be an obligor entity.