Taxation Laws Amendment Act (No. 4) 2002 (53 of 2002)

Schedule 1   Thin capitalisation

Part 1   Amendments

Income Tax Assessment Act 1997

37   After section 820-942

Insert:

Subdivision 820-KA - Cost-free debt capital

Guide to Subdivision 820-KA

820-945 What this Subdivision is about

This Subdivision sets out the meaning of cost-free debt capital for the purposes of this Division.

Table of sections

820-946 What is cost-free debt capital ?

[This is the end of the Guide.]

820-946 What is cost-free debt capital ?

(1) This subsection applies to an entity for a period that is all or a part of an income year if the entity satisfies all of the following:

(a) the entity is an *outward investing entity (non-ADI) or *inward investing entity (non-ADI) for that period;

(b) if the entity is a *foreign entity - the entity holds any of the following assets throughout that period:

(i) assets that are attributable to the entity's *Australian permanent establishments;

(ii) other assets that are held for the purposes of producing the entity's assessable income;

(c) both of the following apply to the entity:

(i) the total *debt deductions of the entity and all its *associate entities for the income year are more than $250,000;

(ii) the result of applying the formula in section 820-37 to the entity for the income year is less than 0.9;

(d) the entity is not an *exempt entity for the income year.

Note: Paragraph (c) corresponds to the threshold tests for this Division set out in sections 820-35 and 820-37.

(2) If subsection (1) applies to an entity for a period (the relevant period ), the cost-free debt capital of the entity at a particular time during the relevant period is the total value of all the *debt interests *issued by the entity that satisfy all of the following:

(a) the interests are *on issue at that time;

(b) none of the interests gives rise to any cost, at any time, that is covered by paragraph 820-40(1)(a);

(c) each of the interests is covered by subsection (3) or (4) of this section at that time.

(3) This subsection covers a *debt interest held by an entity (the holder ) at that time if:

(a) subsection (1) also applies to the holder for a period (the overlapped period ) that is, or includes, all or a part of the relevant period; and

(b) for the purposes of applying this Division to both the holder and the issuer of the interest (the issuer ), and in relation to only that part of the overlapped period that falls within the relevant period, either or both of the following apply:

(i) the *valuation days used to calculate the average value of the holder's assets are different from the valuation days used to calculate the issuer's *adjusted average debt;

(ii) the number of valuation days used to calculate the average value of the holder's assets are different from the number of valuation days used to calculate the issuer's adjusted average debt.

(4) This subsection covers a *debt interest held by an entity (the holder ) at the particular time mentioned in subsection (2) if:

(a) subsection (1) does not apply to the holder for a period that is, or includes, all or a part of the relevant period; and

(b) at that time, the debt interest has been *on issue for a period of less than 180 days.

(5) For the purposes of subsection (2), take into account the value of a *debt interest issued by a *foreign entity only to the extent that the interest is attributable to assets covered by subparagraph (1)(b)(i) or (ii) that are held by the foreign entity throughout the relevant period.