Question 19
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 A item 19 and complete the required fields.
At item 19 write the average quarterly balance of debt interests issued (finance received).
At C item 19 write the average quarterly balance of debt interests held (finance provided.
At D item 19 write the average quarterly balance of equity interests issued (finance received).
At E item 19 write the average quarterly balance of equity interests held (finance provided.
Work it out
For help working out the tax characterisation of an interest as debt or equity (debt and equity tests), see:
Division 974 of the ITAA 1997
Debt and equity tests: guide to 'at call' loans.
End of work it outExample
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:
Question 20
This question aims to identify if you are subject to taxation of financial arrangements (TOFA) rules contained in Division 230 of ITAA 1997. Understanding whether you are subject to the TOFA rules and the tax timing method elections you have made will provide us with the context to understand the information you report regarding your financial arrangements.
The TOFA rules will apply to you if your aggregated turnover, financial assets or assets exceed relevant thresholds or you have otherwise made an election for the TOFA rules to apply.
If you are subject to the TOFA rules contained in Division 230 of the ITAA 1997 answer Yes at A item 20 and complete the required fields.
If you answer Yes, you need to specify which (if any) of the tax timing method elections you have made to assess your gains and losses from financial arrangements, at B to F item 20. If no election was made, you should complete G. These tax timing method elections are contained in subdivisions 230-C to 230-F of the ITAA 1997.
Work it out
For help working out if Division 230 of the ITAA 1997 applies to you and the relevant threshold tests, refer to:
- Guide to the taxation of financial arrangements and select 'Background', 'Four stages of reform' and 'Stages 3 and 4: TOFA'
- section 230-455 of the ITAA 1997.
Example
ABC Co is an authorised deposit taking institution and the TOFA rules apply to all of its financial arrangements entered into on or after 1 July 2010.
ABC Co has made elections in accordance with Division 230 of the ITAA 1997 to apply the fair value method and the foreign exchange retranslation method – general election.
With this information, ABC Co would complete question 20 as follows: