Income Tax Assessment Act 1997

CHAPTER 4 - INTERNATIONAL ASPECTS OF INCOME TAX  

PART 4-5 - GENERAL  

Division 832 - Hybrid mismatch rules  

Subdivision 832-J - Integrity rule  

Operative provisions

SECTION 832-725   Payments made to interposed foreign entity (integrity measure) - denial of deduction  

832-725(1)    
Subsection (3) applies if:

(a) an entity (the paying entity ) makes a payment under a *scheme to a *foreign entity (the interposed foreign entity ), either directly, or indirectly through one or more interposed *Australian trusts or Australian partnerships (within the meaning of Part X of the Income Tax Assessment Act 1936 ); and

(b) the paying entity, the interposed foreign entity and another foreign entity (the ultimate parent entity ) are in the same *Division 832 control group; and

(c) the ultimate parent entity is not controlled by any other entity (other than an entity that is not a member of the Division 832 control group); and

(d) the payment is of:

(i) an amount of interest (within the meaning of subsection 128A(1AB) of the Income Tax Assessment Act 1936 ); or

(ii) an amount under a *derivative financial arrangement; and

(e) an entity is entitled to a deduction in an income year in respect of the payment (disregarding this section); and

(f) the payment is not *subject to Australian income tax; and

(g) either:

(i) the payment is *subject to foreign income tax in one or more foreign countries, and the highest rate (the foreign country rate ) at which the payment is subject to foreign income tax is 10% or less; or

(ii) the payment is not subject to foreign income tax; and

(h) it is reasonable to conclude (having regard to the matters in subsection (2)) that the entity, or one of the entities, who entered into or carried out the scheme or any part of the scheme did so for a principal purpose of, or for more than one principal purpose that includes a purpose of:

(i) enabling a deduction to be obtained in respect of the payment; and

(ii) enabling foreign income tax to be imposed on the payment at a rate of 10% or less, or enabling foreign income tax not to be imposed on the payment.

832-725(1A)    

For the purposes of subsection (1), disregard paragraphs 832-130(7)(d) and (e) (exclusion of municipal and State taxes in working out what is *subject to foreign income tax).

832-725(2)    
For the purposes of paragraph (1)(h), have regard to the following matters:

(a) the facts and circumstances that exist in relation to the *scheme;

(b) if the payment is an amount of interest as mentioned in subparagraph (1)(d)(i) - the source of the funds used by the interposed foreign entity to provide the paying entity with the loan or other debt interest in respect of which the payment of interest is made;

(c) whether the interposed foreign entity engages in substantial commercial activities in carrying on a banking, financial or other similar business.

832-725(3)    

The entity mentioned in paragraph (1)(e) is not entitled to the deduction mentioned in that paragraph.

832-725(4)    
Subsection (3) does not apply if it is reasonable to conclude that:

(a) the following requirements are satisfied:

(i) the amount of the payment is taken into account under Part X of the Income Tax Assessment Act 1936 ;

(ii) the sum of the *attribution percentages of each *attributable taxpayer in relation to the interposed foreign entity, for the purposes of sections 456 and 457 of that Act in respect of the income year in which the payment is made, is at least 100%; or

(b) requirements similar to those in paragraph (a), under the law of a foreign country that has substantially the same effect as Part X of that Act in respect of that foreign country, are satisfied in relation to the interposed foreign entity; or

(c) assuming that the payment were treated as being divided into 2 separate payments:

(i) the requirements in paragraph (a) would be satisfied in relation to one of those separate payments; and

(ii) the requirements in paragraph (b) would be satisfied in relation to the other of those separate payments.

832-725(5)    
Subsection (3) does not apply if it is reasonable to conclude that, assuming that the payment had been made directly to the ultimate parent entity:

(a) the payment would:

(i) be *subject to foreign income tax at a rate that is the same as, or less than, the foreign country rate; or

(ii) not be subject to foreign income tax; and

(b) the payment would not give rise to a *hybrid financial instrument mismatch, a *hybrid payer mismatch or a *reverse hybrid mismatch.

832-725(6)    

Subsection (3) does not apply if the payment gives rise to a *hybrid financial instrument mismatch, a *hybrid payer mismatch, a *reverse hybrid mismatch, a *branch hybrid mismatch or an *imported hybrid mismatch.

832-725(7)    

Subsection (3) does not apply to the extent that an amount to which the payment relates was not allowable as a deduction under subsection 832-530(2) .