Factors attracting our attention
There are key risk factors of related-party funding arrangements that attract our attention.
Where one or more of these factors are present, the risk of your related-party funding arrangement increases and you are more likely to attract compliance activity.
We expect you to carefully consider the commerciality of your arrangement and maintain documentation and evidence to support your approach.
Funding structure
Factors attracting our attention include:
- no or limited equity (capital) contributed by the investor or developer
- funding that appears to be equity under arm's length conditions, but is treated as debt.
This is a risk because insufficient equity (capital) or excessive debt may result in excessive interest deductions.
Debt
Factors attracting our attention include:
- insufficient evidence to support the arm’s length nature of related-party loans
- related-party loans that are priced as subordinated debt including when
- there is no senior debt at all
- more reasonable funding options were realistically available such as additional senior debt or equity
- group funding practices don't demonstrate the use of third-party subordinated debt in comparable circumstances
- used at the land acquisition stage, or in relation to stabilised assets (for example, existing income-producing property)
- interest expenses on related-party loans that would cause an investment or development to
- have questionable viability
- not meet its profitability expectations.
This is a risk because the use of non-arm's length terms and conditions (such as subordination) to justify higher interest rates may result in excessive interest deductions.
Amount of debt
A factor attracting our attention is an amount of related-party debt that exceeds what might be expected between parties acting at arm’s length in comparable circumstances.
This is a risk because a non-arm’s length amount of related-party debt may result in excessive interest deductions.
Currency
A factor attracting our attention is related-party loans that are not denominated in the operating currency of the Australian borrower. This is typically Australian dollars.
This is a risk because an inconsistent borrowing currency may result in greater deductions to the Australian borrower.
Interest payments
A factor attracting our attention is deferring the payment or crediting of interest when the borrower has financial capacity to meet payment obligations on related-party loans.
This is a risk because deferring the payment or crediting of interest may result in the:
- deferral or avoidance of interest withholding tax
- denial of interest deductions.
Term
Factors attracting our attention include:
- misalignment between the funding needs of the investment or development, and the term of the related-party loan
- unpaid principal and accrual of interest on related-party loans beyond the investment period or project completion
- unpaid principal and accrual of interest beyond the term of the related-party loan.
This is a risk because related-party loans that extend beyond an arm’s length term may result in excessive interest deductions.
Security
A factor attracting our attention is related-party loans that are priced as unsecured debt.
This is a risk because we haven't observed unsecured third-party debt for property investments or developments. The absence of security to justify higher interest rates may result in excessive interest deductions.
Repayment or refinancing
Factors attracting our attention include:
- related-party loans for property investments that are not repaid after the property has been sold
- related-party loans for development projects that are not repaid when the project has generated sufficient cash flow
- related-party loans that are not refinanced as soon as practicable when circumstances change or when a better funding opportunity is available (such as refinancing to a stabilised loan facility)
- moving funds from a completed project to another project or entity without repaying the loan.
This is a risk because it may result in excessive interest deductions.
Other issues that attract our attention
For more information on other behaviours, characteristics and tax issues that attract our attention, see Privately owned and wealthy groups – What attracts our attention including international transactions that attract our attention.