Treasury Laws Amendment (Making Multinationals Pay Their Fair Share - Integrity and Transparency) Act 2024 (23 of 2024)
Schedule 2 Thin capitalisation
Part 1 Amendments
Income Tax Assessment Act 1997
76 After Subdivision 820-E
Insert:
Subdivision 820-EAA - Debt deduction limitation rules for debt deduction creation (all relevant entities)
Guide to Subdivision 820-EAA
820-423 What this Subdivision is about
This Subdivision sets out debt deduction limitation rules that apply to entities that are dealt with in rules set out in Subdivisions 820-AA, 820-B, 820-C, 820-D or 820-E. These rules deal with:
(a) debt deductions in relation to the acquisition of CGT assets, or legal or equitable obligations, from associate pairs of the acquirer; and
(b) debt deductions in relation to a financial arrangement that is entered into by an entity to fund etc. certain payments or distributions to one or more associate pairs of the entity.
The rules in this Subdivision are applied before the rules set out in Subdivisions 820-AA, 820-B and 820-C. If a debt deduction of an entity is disallowed under this Subdivision, the debt deduction is disregarded for the purpose of applying those other Subdivisions (see section 820-31).
Table of sections
Operative provisions
820-423A Debt deduction limitation rule for debt deduction creation (all relevant entities)
820-423B Amount of debt deduction disallowed
820-423C This Subdivision does not limit reduction of debt deductions other provisions
820-423D Schemes relating to this Subdivision
Operative provisions
820-423A Debt deduction limitation rule for debt deduction creation (all relevant entities)
Debt deduction limitation rule
(1) This subsection disallows all or part of a *debt deduction of an entity for an income year if, for that year:
(a) the entity is any of the following for that year:
(i) a *general class investor;
(ii) an *outward investing financial entity (non-ADI);
(iii) an *inward investing financial entity (non-ADI); and
(aa) the entity is not a *securitisation vehicle; and
(b) subsection (2) or (5) applies.
Note 1: This Subdivision does not apply if the total debt deductions of that entity and all its associate entities for that year are $2 million or less: see section 820-35.
Note 1A: This Subdivision does not apply to certain special purpose entities: see section 820-39.
Note 2: To work out the amount to be disallowed, see section 820-423B.
Acquisition of CGT asset, or legal or equitable obligation
(2) This subsection applies if all of the following conditions are satisfied:
(a) an entity (the acquirer ) *acquires a *CGT asset, or a legal or equitable obligation, either directly, or indirectly through one or more interposed entities, from one or more other entities (each of which is a disposer );
(b) one or more of the disposers (each of which is an associate disposer ) is an *associatepair of the acquirer;
(c) the entity mentioned in subsection (1) (the relevant entity ) is:
(i) the acquirer; or
(ii) an associate pair of the acquirer; or
(iii) an associate pair of an associate disposer;
(d) the relevant entity's *debt deduction mentioned in subsection (1) is, wholly or partly, in relation to any of the following:
(i) the acquisition mentioned in paragraph (a) of this subsection;
(ii) the acquirer's holding of the CGT asset, or legal or equitable obligation;
(e) the relevant entity's debt deduction mentioned in subsection (1) is referable to an amount paid or payable, either directly or indirectly, to any of the following:
(i) an associate pair of the relevant entity;
(ii) an associate pair of the acquirer;
(iii) an associate pair of an associate disposer;
(f) the acquisition mentioned in paragraph (a) of this subsection is not covered by section 820-423AA (which is about exceptions);
(g) the relevant entity has not made a choice under subsection 820-46(4) to use the third party debt test for the income year mentioned in subsection (1) of this section.
(3) To avoid doubt, subsection (2) may apply more than once in relation to the *acquisition of a *CGT asset, or a legal or equitable obligation.
(3A) For the purposes of subsection (2):
(a) that subsection may apply in relation to an indirect *acquisition by an entity through one or more interposed entities even if an acquisition in the series is covered by section 820-423AA (which is about exceptions); and
(b) in determining whether an acquisition occurs indirectly through one or more interposed entities:
(i) it is sufficient if acquisitions exist between each entity; and
(ii) it is not necessary to demonstrate that each acquisition in a series of acquisitions happened before the next acquisition.
Example: Entity A acquires a membership interest in Entity B that is covered by the exception in subsection 820-423AA(1). Entity B later acquires, from Entity C, a CGT asset that is not covered by an exception in that section. There may be an indirect acquisition of the CGT asset by Entity A.
(4) For the purposes of subsections (2), (3) and (3A), disregard paragraph (b) of the definition of "acquire" in subsection 995-1(1).
Financial arrangements involving associate pairs
(5) This subsection applies if all of the following conditions are satisfied:
(a) an entity (the payer ) enters into, or has a *financial arrangement with another entity;
(b) the payer uses the financial arrangement to:
(i) fund; or
(ii) facilitate the funding of;
one or more payments or distributions, of which one or more is a payment or distribution that, to an extent:
(iii) the payer makes to an entity (an associate recipient ) that is an *associate pair of the payer; and
(iv) is covered by subsection (5A) (which is about types of payments or distributions);
(c) the entity mentioned in subsection (1) (the relevant entity ) is any of the following:
(i) the payer;
(ii) an associate pair of the payer;
(iii) an associate pair of an associate recipient;
(d) the relevant entity's *debt deduction mentioned in subsection (1) is, wholly or partly, in relation to the financial arrangement mentioned in paragraph (a) of this subsection;
(e) the relevant entity's debt deduction is referable to an amount paid or payable, either directly or indirectly, to any of the following:
(i) an associate pair of the relevant entity;
(ii) an associate pair of the payer;
(iii) an associate pair of an associate recipient;
(f) the relevant entity has not made a choice under subsection 820-46(4) to use the third party debt test for the income year mentioned in subsection (1) of this section.
(5A) This subsection covers the following:
(a) a *dividend, *distribution or *non-share distribution;
(b) a distributionby a trustee or partnership;
(c) a return of capital, including a return of capital made by a distribution or payment made by a trustee or partnership;
(d) a payment or distribution in respect of the cancellation or redemption of a *membership interest in an entity;
(e) a *royalty, or a similar payment or distribution for the use of, or right to use, an asset;
(f) a payment or distribution that is wholly or partly referable to the repayment of principal under a *debt interest if:
(i) the debt interest is issued by the payer; and
(ii) the debt interest is a *financial arrangement that satisfies paragraphs (5)(a), (b) and (c);
(g) a payment or distribution of a kind similar to a payment or distribution mentioned in the preceding paragraphs;
(h) a payment or distribution prescribed by the regulations.
(6) For the purposes of paragraph (5)(b):
(a) the payments or distributions mentioned in that paragraph may be made:
(i) directly, or indirectly through one or more interposed entities (see subsection (7)); and
(ii) before, at or after the time the payer enters into or has the *financial arrangement mentioned in paragraph (5)(a); and
(b) a recipient may be the entity with whom the payer enters into or has the financial arrangement, or another entity.
(7) For the purposes of subparagraph (6)(a)(i), in determining whether a payment or distribution is made indirectly through one or more interposed entities:
(a) it is sufficient if payments exist between each interposed entity; and
(b) it is not necessary to demonstrate that each payment in a series of payments funds the next payment, or is made after the previous payment.
820-423AA Exceptions for acquisition of certain CGT assets
Acquisition of new membership interests in entities
(1) For the purposes of paragraph 820-423A(2)(f), the acquisition of a *CGT asset is covered by this section if:
(a) the CGT asset is a *membership interest in:
(i) an *Australian entity; or
(ii) a *foreign entity that is a company; and
(b) the membership interest has not previously been held by any entity.
Acquisition of certain new depreciating assets
(2) For the purposes of paragraph 820-423A(2)(f), the acquisition of a *CGT asset is covered by this section if all of the following conditions are satisfied:
(a) the CGT asset is a *depreciating asset other than an intangible asset;
(b) an entity (the acquirer ) holds the CGT asset immediately after its acquisition;
(c) at the time of the acquisition, it is reasonable to conclude that the acquirer expects to use the CGT asset:
(i) for a *taxable purpose; and
(ii) within Australia; and
(iii) within 12 months;
(d) at the time of the acquisition, the CGT asset has not been *installed ready for use, or previously used for a taxable purpose, by any of the following:
(i) the acquirer;
(ii) an associate disposer of the acquirer;
(iii) an *associate pair of the acquirer.
Acquisition of certain debt interests
(3) For the purposes of paragraph 820-423A(2)(f), the acquisition of a *CGT asset is covered by this section if all of the following conditions are satisfied:
(a) the CGT asset is a *debt interest;
(b) an entity (the acquirer ) holds the debt interest immediately after its acquisition;
(c) the debt interest is issued by an *associate pair of the acquirer;
(d) the debt interest has not previously been held by any entity.
820-423B Amount of debt deduction disallowed
Acquisition of CGT asset, or legal or equitable obligation
(1) If the condition in subsection 820-423A(2) is met, the amount of the *debt deduction disallowed under subsection 820-423A(1) is the amount of the debt deduction, to the extent that the relevant entity mentioned in subsection 820-423A(2) incurred it in relation to any of the following:
(a) the acquisition mentioned in subparagraph 820-423A(2)(d)(i);
(b) the holding mentioned in subparagraph 820-423A(2)(d)(ii).
Financial arrangements involving associate pairs
(2) If the conditions in subsection 820-423A(5) are met, then under subsection 820-423A(1) the *debt deduction is disallowed to the same extent as the extent to which the payer mentioned in paragraph 820-423A(5)(a) uses the *financial arrangement in a manner that satisfies paragraph 820-423A(5)(b).
820-423C This Subdivision does not limit reduction of debt deductions under other provisions
Nothing in this Subdivision limits other provisions of this Division in their application to reduce, or further reduce, *debt deductions of an entity.
820-423D Schemes relating to this Subdivision
(1) Subsection (2) applies if the Commissioner is satisfied that:
(a) it is reasonable to conclude that one or more entities (each of which is a participant ) entered into or carried out a *scheme for the principal purpose of, or for more than one principal purpose that included the purpose of, achieving any of the following results:
(i) subsection 820-423A(2) does not apply in relation to a *debt deduction;
(ii) subsection 820-423A(5) does not apply in relation to a debt deduction;
(whether or not the debt deduction is a debt deduction of any of the participants and whether or not any of them carried out the scheme or any part of the scheme); and
(b) the scheme has achieved, or apart from this section would achieve, that purpose.
(2) The Commissioner may determine that this Act has, and is taken always to have had, effect as if:
(a) subsection 820-423A(2) applies in relation to the *debt deduction; or
(b) subsection 820-423A(5) applies in relation to the debt deduction.
(3) A determination under subsection (2) has effect accordingly.
(4) This section applies whether or not the scheme has been or is entered into or carried out in Australia or outside Australia, or partly in Australia and partly outside Australia.
(5) A determination under subsection (2) is not a legislative instrument.
(6) An entity who is dissatisfied with a determination under subsection (2) made in relation to the entity may object against the determination in the manner set out in Part IVC of the Taxation Administration Act 1953.
820-423E Modified meaning of associate pair
(1) This section applies for the purposes of determining whether, for the purposes of this Subdivision, an entity that is a unit trust is an associate pair of another entity.
Treating certain unit trusts as companies
(2) Subsection (3) applies if any of the following *CGT events are capable of applying to all of the units and interests in the trust:
(a) *CGT event E4;
(b) *CGT event E10.
(3) For the purposes of determining, under section 318 of the Income Tax Assessment Act 1936, whether:
(a) the trust is an *associate of another entity; or
(b) another entity is an associate of the trust;
treat the trust as if it were a company.
Application of sufficient influence test
(4) In determining whether the trust is sufficiently influenced by another entity for the purposes of subsection 318(2) of the Income Tax Assessment Act 1936, as applied by subsection (3) of this section:
(a) treat the trust as sufficiently influenced by another entity or other entities if the trust is accustomed or under an obligation (whether formal or informal), or might reasonably be expected, to act in accordance with the directions, instructions or wishes of the other entity or other entities (whether those directions, instructions or wishes are, or might reasonably be expected to be, communicated directly or through interposed companies, partnerships or trusts); and
(b) another entity or other entities are taken to hold a majority voting interest in the trust if either of the following percentages is not less than 50%:
(i) the percentage of the income of the trust represented by the share of the income to which the other entity or other entities are entitled, or that the other entity or other entities are entitled to acquire;
(ii) the percentage of the corpus of the trust represented by the share of the corpus to which the other entity or other entities are entitled, or that the other entity or other entities are entitled to acquire; and
(c) disregard the operation that paragraphs 318(6)(b) and (c) of that Act would otherwise have by reason only of subsection (3) of this section.
(5) Subsection (6) applies in determining whether the trust:
(a) is sufficiently influenced by another entity for the purposes of section 318 of the Income Tax Assessment Act 1936; or
(b) sufficiently influences another entity for the purposes of that section.
(6) If:
(a) there is any breach by any entity of the terms of a *debt interest issued by, or held by, the trust; and
(b) there are reasonable grounds to believe that the breach occurred only to protect the interests of secured creditors in relation to the debt interest;
sufficient influence is not taken to exist in relation to the trust merely because of the breach.
820-423F Modified meaning of Australian entity
For the purposes of this Subdivision, in determining whether an entity is an *Australian entity (including for the purposes of determining whether another entity is a *foreign entity) at a particular time:
(a) for the purposes of paragraph 336(a) of the Income Tax Assessment Act 1936, treat a partnership as being an Australian entity if, at that time, a *direct participation interest of 50% or more is held in the partnership by one or more of the following:
(i) an Australian resident;
(ii) an *Australian trust; and
(b) disregard section 337 of that Act.
Subdivision 820-EAB - Third party debt concepts
Guide to Subdivision 820-EAB
820-427 What this Subdivision is about
This Subdivision sets out concepts concerning third party debt. These concepts are relevant to entities that choose to apply the third party debt test, that is:
(a) general class investors that make a choice, or that are taken to have made a choice, under subsection 820-46(4); and
(b) outward investing financial entities (non-ADI) that make a choice under subsection 820-85(2C); and
(c) inward investing financial entities (non-ADI) that make a choice under subsection 820-185(2C).
Table of sections
Operative provisions
820-427A Meaning of third party earnings limit and third party debt conditions
820-427B Consequences of conduit financing conditions being met
820-427C Conduit financing conditions
820-427D Modified meaning of associate entity
Operative provisions
820-427A Meaning of third party earnings limit and third party debt conditions
(1) An entity's third party earnings limit for an income year is the sum of each *debt deduction of the entity for the income year (disregarding this Division) that is attributable to a *debt interestissued by the entity that satisfies the *third party debt conditions in relation to the income year.
(2) For the purposes of subsection (1), treat a *debt deduction of an entity as being attributable to a *debt interest issued by the entity to the extent that:
(a) the debt deduction is directly associated with hedging or managing the interest rate risk in respect of the debt interest; and
(b) the debt deduction is not referable to an amount paid or payable, directly or indirectly, to an *associate entity (see section 820-427D) of the entity.
(3) A *debt interest issued by an entity satisfies the third party debt conditions in relation to an income yearif the following conditions are satisfied:
(a) the entity issued the debt interest to an entity that is not an *associate entity (see section 820-427D) of the entity;
(b) the debt interest is not held at any time in the income year by an entity that is an associate entity of the entity;
(c) disregarding recourse to minor or insignificant assets, the holder of the debt interest has recourse for payment of the debt to which the debt interest relates only to Australian assets that:
(i) are covered by subsection (4); and
(ii) are not rights covered by subsection (5) (about credit support rights);
(d) the entity uses all, or substantially all, of the proceeds of issuing the debt interest to fund its commercial activities in connection with Australia that do not include:
(i) any *business carried on by the entity at or through its *overseas permanent establishments; and
(ii) the holding by the entity of any *associate entity debt, *controlled foreign entity debt or *controlled foreign entity equity;
(e) the entity is an *Australian entity (see section 820-427E).
(4) This subsection covers Australian assets that:
(a) are held by the entity; or
(b) are *membership interests in the entity (unless the entity has a legal or equitable interest, whether directly or indirectly, in an asset that is not an Australian asset); or
(c) are held by an *Australian entity that is a *member of the *obligor group in relation to the *debt interest.
(5) This subsection covers a right under or in relation to a guarantee, security or other form of credit support, other than a right that:
(a) is any of the following:
(i) a right that provides recourse, directly or indirectly, only to one or more Australian assets covered by subsection (4) that are not rights covered by this subsection;
(ii) a right that, assuming that the holder of the right exercised the right, would not reasonably be expected to allow, directly or indirectly, the holder or another entity to have recourse for payment of the debt mentioned in paragraph (3)(c) against an *associate entity (see section 820-427D) of the entity that issued that debt interest;
(iii) a right that relates wholly to the creation or development of a *CGT asset that is, or is reasonably expected to be, land situated in Australia (including an interest in land, if the land is situated in Australia);
(iv) a right that relates wholly to the creation or development of a CGT asset that is, or is reasonably expected to be, moveable property situated, or to be situated, on land of a kind mentioned in subparagraph (iii), where that moveable property is, or is reasonably expected to be, relevant to the income producing use of the land and situated on the land for the majority of its useful life;
(v) a right that relates wholly to the creation or development of a CGT asset that is, or is reasonably expected to be, offshore renewable energy infrastructure (within the meaning of the Offshore Electricity Infrastructure Act 2021) situated, or to be situated, in a declared area (within the meaning of that Act) for the majority of its useful life;
(vi) a right that relates wholly to the creation or development of a CGT asset that is, or is reasonably expected to be, offshore electricity transmission infrastructure (within the meaning of the Offshore Electricity Infrastructure Act 2021) that is directly related to offshore renewable energy infrastructure covered by subparagraph (v); and
(b) assuming that the holder of the right exercised the right, the right would not reasonably be expected to allow, directly or indirectly, the holder or another entity to have recourse for payment of the debt mentioned in paragraph (3)(c) of this section against a *foreign entity that is an *associate entity of the entity that issued the *debt interest.
(6) For the purposes of subparagraphs (5)(a)(iii), (iv), (v) and (vi), in determining whether a right relates wholly to the creation or development of a *CGT asset of a kind mentioned in the relevant subparagraph, disregard the extent (if any) to which the right relates incidentally to another matter.
820-427B Modified third party debt conditions for conduit financing
(1) If a *debt interest satisfies the conditions in subsection 820-427C(1) in relation to an income year, then this section applies in relation to:
(a) that debt interest (the relevant debt interest ); and
(b) the debt interest that is the ultimate debt interest mentioned in subsection 820-427C(1) in relation to the relevant debt interest.
Special rules for third party debt conditions - ultimate debt interest and relevant debt interest
(2) In applying section 820-427A in relation to the income year, in relation to the relevant debt interest and the ultimate debt interest:
(a) treat the reference in subparagraph 820-427A(3)(d)(ii) to *associate entity debt as being a reference to associate entity debt other than:
(i) a debt interest that satisfies the conditions in subsection 820-427C(1) in relation to the ultimate debt interest; or
(ii) a debt interest issued by an entity that is an *Australian entity and that has made a choice under subsection 820-46(4) to use the third party debt test for the income year; and
(b) treat references in paragraphs 820-427A(4)(a) and (b) to the entity as including the conduit financer mentioned in paragraph 820-427C(1)(a) and each entity that issues a debt interest that satisfies the conditions in subsection 820-427C(1) in relation to the ultimate debt interest.
Special rules for third party debt conditions - relevant debt interest
(3) In applying subsection 820-427A(3) in relation to the income year, in relation to the relevant debt interest, in addition to applying subsection (2) of this section:
(a) treat the conditions in paragraphs 820-427A(3)(a) and (b) as being satisfied; and
(b) treat subsection 820-427A(3) as also including the condition that the ultimate debt interest satisfies the *third party debt conditions (having regard to subsection (2) of this section) in relation to the income year.
820-427C Conduit financing conditions
(1) If, in relation to an income year:
(a) an entity (the conduit financer ) issues a *debt interest (the ultimate debt interest ) to an entity (the ultimate lender ) that is not an *associate entity (see section 820-427D) of the conduit financer; and
(b) an entity (the borrower ) that is an associate entity of the conduit financer issues another debt interest (the relevant debt interest ) to:
(i) the conduit financer; or
(ii) another entity (the conduit borrower ) that is an associate entity of the conduit financer and the borrower; and
(c) the amount loaned under the relevant debt interest:
(i) if subparagraph (b)(i) applies - was financed by the conduit financer only with proceeds from the ultimate debt interest; or
(ii) if subparagraph (b)(ii) applies - was financed by the conduit borrower only with proceeds from another debt interest that is also a debt interest that satisfies the conditions in this subsection in relation to the ultimate debt interest because of a previous operation of this subsection; and
(d) the terms of the relevant debt interest, to the extent that those terms relate to costs incurred by the borrower in relation to the relevant debt interest, are the same as the terms of the ultimate debt interest, to the extent that those terms relate to such costs incurred by the conduit financer in relation to the ultimate debt interest; and
(e) the conduit financer, the borrower and each conduit borrower (if any) are *Australian entities (see section 820-427E); and
(f) it is not the case that subparagraph 820-46(1)(b)(i) or (ii) applies (fixed ratio test or group ratio test applies) to the conduit financer, the borrower or any conduit borrowers;
then the relevant debt interest satisfies the conditions in this subsection in relation to the income year.
(2) For the purposes of paragraph (1)(d):
(a) disregard the terms of a *debt interest that is:
(i) a relevant debt interest; or
(ii) the ultimate debt interest;
to the extent that those terms relate to the amount of the debt to which the debt interest relates; and
(b) disregard the terms (if any) of the ultimate debt interest that have the effect of allowing (whether directly, or indirectly through one or more interposed borrowers) the recovery of reasonable administrative costs that relate directly to the ultimate debt interest; and
(c) disregard the terms (if any) of a relevant debt interest issued to the conduit financer that have the effect of allowing (whether directly, or indirectly through one or more interposed borrowers) the recovery of reasonable administrative costs of the conduit financer that relate directly to the relevant debt interest; and
(d) disregard the terms (if any) of a relevant debt interest, to the extent that those terms have the effect of allowing (whether directly, or indirectly through one or more interposed borrowers) the recovery of costs of the conduit financer that:
(i) are a *debt deduction for the income year of the conduit financer; and
(ii) are a debt deduction that is treated as being attributable to the ultimate debt interest under subsection 820-427A(2) because it is directly associated with hedging or managing the interest rate risk in respect of the ultimate debt interest; and
(e) disregard the terms (if any) of a relevant debt interest, to the extent that those terms have the effect of allowing (whether directly, or indirectly through one or more interposed borrowers) the recovery of costs of a borrower that:
(i) are a debt deduction for the income year of the borrower; and
(ii) are a debt deduction that is treated as being attributable to another debt interest under subsection 820-427A(2) because it is directly associated with hedging or managing the interest rate risk in respect of that other debt interest.
820-427D Modified meaning of associate entity
(1) For the purposes of this Subdivision, in determining whether an entity is an associate entity of another entity:
(a) treat the references in paragraphs 820-905(1)(a) and 820-905(2A)(a) to "an *associate interest of 50% or more" as instead being:
(i) for the purposes of paragraph 820-427A(5)(b) - a reference to "a *TC control interest of 50% or more"; or
(ii) for the purposes of any other provision in this Subdivision - a reference to "a *TC control interest of 20% or more"; and
(aa) disregard the requirement in subsections 820-905(1) and (2A) that the entity is an *associate of the other entity, unless only paragraph 820-905(1)(b) applies; and
(b) treat subsection 820-860(3) as applying for the purposes of determining whether the entity is an associate entity of the other entity (as a result of paragraph (a) of this subsection); and
(c) treat the purposes mentioned in subparagraphs 820-870(1)(b)(i) and (ii) as including the purposes of determining whether the entity is an associate entity of the other entity (as a result of paragraph (a) of this subsection).
(2) For the purposes of this Subdivision:
(a) treat an entity (the first entity ) that has entered into a *cross-staple arrangement with another entity as an associate entity of that other entity; and
(b) if that other entity is itself an associate entity of a conduit financer mentioned in section 820-427C (whether because of another operation of this subsection or otherwise) - treat the first entity as an associate entity of the conduit financer.
820-427E Modified meaning of Australian entity
For the purposes of this Subdivision, in determining whether an entity is an *Australian entity at a particular time:
(a) for the purposes of paragraph 336(a) of the Income Tax Assessment Act 1936, treat a partnership as being an Australian entity if, at that time, a *direct participation interest of 50% or more is held in the partnership by one or more of the following:
(i) an Australian resident;
(ii) an *Australian trust; and
(b) disregard section 337 of that Act.