DDCR concepts and terms

Associate pairs

An 'associate pair' is a new term introduced for the debt deduction creation rules (DDCR).

It uses the pre-existing definition of associate in section 318 of the Income Tax Assessment Act 1936 (ITAA 1936).

An entity is an 'associate pair' of another entity if any of the following conditions are met:

• The entity is an associate of the other entity.
• The other entity is an associate of the entity.

The definition of 'associate pair' only requires that one of the entities is an associate of the entity. It is not necessary to test whether both entities satisfy the definition of associate.

For example, if an Entity A is an associate of an Entity B, it follows that Entity A and Entity B are both an associate pair of one another.

Modified meanings or definitions

Modified meaning of 'associate pair' for certain unit trusts

Section 820-423E of the Income Tax Assessment Act 1997 (ITAA 1997) modifies the definition of 'associate pair' for certain purposes when applying the DDCR.

Modified definition of 'associate' for unit trusts where CGT event E4 or E10 apply

This modified definition applies to a unit trust if CGT events E4 or E10 are capable of applying to all of the units and interests in the trust.

It operates to treat the trust as if it were a company when determining whether:

• The trust is an associate of another entity
• Another entity is an associate of the trust.

Modification of 'sufficient influence' test for unit trusts

Section 820-423E also modifies the application of the 'sufficient influence' test for a unit trust, as follows:

• The unit trust is treated as sufficiently influenced by another entity or other entities if the unit trust is accustomed or under an obligation (whether formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of the other entity or other entities (whether those directions, instructions or wishes are, or might reasonably be expected to be, communicated directly, or through interposed companies, partnerships or trust.
• Another entity or other entities are taken to hold a majority voting interest in the unit trust if either of the following percentages is not less than 50%
  • the percentage of the income of the unit trust represented by the share of the income to which the other entity or other entities are entitled, or that the other entity or other entities are entitled to acquire
  • the percentage of the corpus of the unit trust represented by the share of the corpus to which the other entity or other entities are entitled, or that the other entity or other entities are entitled to acquire.
• Disregard the operation of paragraphs 318(6)(b) and (c) of the ITAA 1936.
• Sufficient influence is not taken to exist in relation to a unit trust merely because of a breach by any entity of the terms of a debt interest issued by, or held by, the unit trust if there are reasonable grounds to believe that the breach occurred only to protect the interests of secured creditors in relation to the debt interest.

Modified definition of 'Australian entity'

An 'Australian entity' is defined in section 336 of Part X of ITAA 1936 as one of an:

• Australian partnership
• Australian trust
• entity (other than a partnership or trust) that is a Part X Australian resident.

A 'Part X Australian resident' is an entity which is resident of Australia, excluding any entity treated solely as a resident of another country under a double-taxation agreement between Australia and that country.

Modifications to definition of Australian entity under the DDCR

Section 337 of the ITAA 1936 is disregarded for the purpose of determining whether an entity is an Australian entity for applying the DDCR.

Under the DDCR, a partnership is treated as an Australian entity where at least a 50% direct participation interest is held in the partnership by either:

• Australian residents
• Australian trusts.