Complete by placing an 'X' in the applicable box. If you answer 'yes', you need to complete the remaining labels as appropriate.
To complete this question, you will need to:
- identify all financing arrangements you held during the income year that were undertaken with international related parties and 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 you received from a related party and those that you provided 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 that you
- received from a related party and is characterised as a debt interest under Division 974 of the ITAA 1997
- provided to a related party and is characterised as a debt interest under Division 974 of the ITAA 1997
- received from a related party and is characterised as an equity interest under Division 974 of the ITAA 1997
- provided to a related party and is characterised as an equity interest under Division 974 of the ITAA 1997.
This information will 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:
- 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 terms debt interest and equity interest are defined in Division 974 of the ITAA 1997.
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
- Debt and equity tests guide.
Example
Bob & Co analyses the financial arrangements they held during the income year that were entered into with international related parties.
Bob & Co identifies the following information:
Table 1
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 accounting purposes.
Table 2
Financial arrangements |
Average quarterly balances |
|||
Tax treats as debt |
Tax 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 |
Totals |
16,800,000 |
26,750,000 |
54,875,000 |
0 |
With this information Bob & Co complete question 19 as follows.