Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello MP)Chapter 5 - Debt and equity interests - at call loans
Outline of chapter
5.1 Schedule 5 to this bill amends the Income Tax Assessment Act 1997 (ITAA 1997) so that the transitional period for at call loans under the debt/equity rules will extend to 30 June 2005.
Context of amendments
5.2 The debt/equity rules in Division 974 of the ITAA 1997 set out what is debt and what is equity for various income tax purposes. These rules can apply from 1 July 2001.
5.3 A transitional rule deems certain related party at call loans entered into on or after 21 February 2001, and on or before 31 December 2002, to be a debt interest. These are typically loans by small business owners to their business, have no fixed term and are repayable on demand.
5.4 The former Minister for Revenue and Assistant Treasurer announced that the Government would extend this transitional period to 30 June 2004 (Press Release No. C131/02 of 16 December 2002) and later announced a further extension to 30 June 2005 (Press Release No. C045/04 of 24 May 2004).
Summary of new law
5.5 At call loans made to a company by a connected entity of the company and entered into on or before 30 June 2005 will be treated as debt interests under the debt/equity rules.
Comparison of key features of new law and current law
| New law | Current law |
|---|---|
| At call loans entered into on or before 30 June 2005 will be treated as debt interests. | At call loans entered into on or after 21 February 2001 and on or before 30 December 2002 are treated as debt interests. |
Detailed explanation of new law
5.6 A financing arrangement entered into on or before 30 June 2005 will be treated as a debt interest when:
- •
- it takes the form of a loan to a company by a connected entity;
- •
- it has no fixed term; and
- •
- it is repayable on demand.
[Schedule 5, item 3, subsection 974-75(4)]
5.7 This applies even if the arrangement was entered into before 21 February 2001. [Schedule 5, item 2, paragraph 974-75(4)(d)]
5.8 'Connected entity' is a defined term in the income tax law: broadly, it is an associate or member of the same corporate group.
5.9 The purpose of these amendments is to give taxpayers extra time to assess existing loans and adjust their arrangements, if need be, in light of the Government's decision to carve out certain small business at call loans from the debt/equity rules (the former Minister for Revenue and Assistant Treasurer's Press Release No. C045/04 of 24 May 2004).
Consequential amendments
5.10 To assist readers, this bill will amend the heading of the relevant provisions to reflect the changes to the law. [Schedule 5, item 1, paragraph 974-75(4)(d)]