This question seeks to help us assess the risk that an interest has been mischaracterised as either:
- a debt interest and inappropriate tax deductions have been claimed
- an equity interest and inappropriate franked distributions have been made.
The information reported at this question may also help us in doing both of the following:
- identifying arrangements with international related parties where the use of hybrid instruments may indicate a tax risk
- assessing any risk regarding your thin capitalisation position.
The dollar amounts or values asked for in this question are all based on your accounting records.
The terms debt interest and equity interest are defined in Division 974 of the ITAA 1997.
To complete this question, you will need to:
- identify all debt and equity interests you had on issue or which you held during the income year that were on issue to or issued by international related parties and where the characterisation between debt and equity is different under Division 974 of the ITAA 1997 from your treatment for accounting purposes
- identify which of those financing arrangements would be classified as debt interests and which would be classified as equity interests under Division 974 of the ITAA 1997
- identify which of those financing arrangements under which you received finance from a related party and those under which you provided finance to a related party
- calculate the average quarterly balance of each relevant financing arrangement (by adding the relevant financing arrangement amount at the end of each quarter and dividing by four)
- add up the total of the average quarterly balances of each financial arrangement under which you
- received finance from a related party that is characterised as a debt interest under Division 974 of the ITAA 1997
- provided finance to a related party that is characterised as a debt interest under Division 974 of the ITAA 1997
- received finance from a related party that is characterised as an equity interest under Division 974 of the ITAA 1997
- provided finance to a related party that is characterised as an equity interest under Division 974 of the ITAA 1997.
If you had financing arrangements to which this question applies, answer 'Yes' at label A of question 19 and complete the required fields.
At item 19, label B, write the average quarterly balance of debt interests issued (finance received).
At item 19, label C, write the average quarterly balance of debt interests held (finance provided.
At item 19, label D, write the average quarterly balance of equity interests issued (finance received).
At item 19, label E, write the average quarterly balance of equity interests held (finance provided.
For help working out the tax characterisation of an interest as debt or equity (debt and equity tests), refer to:
- Division 974 of the ITAA 1997
- the Debt and equity tests guide.
Example
Bob & Co analyses the financial arrangements they had during the income year that were entered into with international related parties where the debt/equity treatment under Division 974 of the ITAA 1997 is different from the debt/equity treatment for accounting purposes.
Bob & Co identifies the following information:
Financial arrangements |
Tax treatment |
Received or provided |
Quarter 1 |
Quarter 2 |
Quarter 3 |
Quarter 4 |
Redeemable preference shares |
Equity |
Received |
35,000,000 |
27,000,000 |
42,000,000 |
23,000,000 |
Convertible notes |
Debt |
Received |
16,800,000 |
16,800,000 |
16,800,000 |
16,800,000 |
Perpetual notes |
Debt |
Provided |
31,000,000 |
28,500,000 |
25,000,000 |
22,500,000 |
Stapled security |
Equity |
Received |
27,500,000 |
32,500,000 |
32,500,000 |
0 |
Bob & Co then collates the following information for those financial arrangements where the debt equity characterisation under Division 974 of the ITAA 1997 is different from their treatment for accounting purposes.
Financial arrangements |
Average quarterly balances |
|||
Div 974 treats as debt |
Div 974 treats as equity |
|||
Received |
Provided |
Received |
Provided |
|
Redeemable preference shares |
na |
na |
31,750,000 |
na |
Convertible notes |
16,800,000 |
na |
na |
na |
Perpetual notes |
na |
26,750,000 |
na |
na |
Stapled security |
na |
na |
23,125,000 |
na |
Total |
16,800,000 |
26,750,000 |
54,875,000 |
0 |
With this information Bob & Co complete question 19 as follows: