Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)General outline and financial impact
Debt and equity rules
This bill defines what constitutes equity in a company and what constitutes debt. This determines the tax treatment of a return on a financing interest issued by a company (i.e. whether it is frankable or may be deductible). The definition of debt also constitutes a key component of the new thin capitalisation regime since it is used to determine what deductions may be disallowed.
Date of effect: 1 July 2001. However, transitional rules allow the issuers of an interest issued before 21 February 2001 that changes character as a result of the new rules to elect to have them treated under the existing law until 1 July 2004.
Proposal announced: The Government released an exposure draft of the rules in the New Business Tax System (Thin Capitalisation and Other Measures) Bill 2001 on 21 February 2001. Treasurers Press Release No. 38 of 22 May 2001 announced changes to the exposure draft legislation.
Financial impact: The revenue impact of this measure is unquantifiable, although it will protect the revenue base from erosion from deductible returns on certain future financial instruments that are equity in economic substance but debt in legal form. To the extent that the revenue base is not protected, there could be a potential significant loss to annual revenue.
Compliance cost impact: The rules will have a minor impact on those financing interests that do not change character. For those interests which change character there will be associated compliance costs in making the transition to the new law. However, these costs will be reduced by the transitional rules.