CHAPTER 6
-
THE DICTIONARY
PART 6-1
-
CONCEPTS AND TOPICS
Division 974
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Debt and equity interests
History
Division 974 inserted by No 163 of 2001, s 3 and Sch 1 item 34.
Act
No 136 of 2010
, s 3 and Sch 3 item 135, contains the following provision, effective 7 December 2010:
Extension of debt and equity transitional arrangements for Upper Tier 2 capital instruments
Definitions
(1)
In this item:
CGT amendments
has the same meaning as in item 118 of Schedule 1 to the
New Business Tax System (Debt and Equity) Act 2001
.
debt and equity test amendments
means the amendments made by Schedule 1 to the
New Business Tax System (Debt and Equity) Act 2001
(other than the CGT amendments), as amended from time to time.
Upper Tier 2 capital instruments
(2)
This item applies to an interest:
(a)
that is issued before 1 July 2001; and
(b)
that is an instrument known as an Upper Tier 2 capital instrument; and
(c)
to which an election under paragraph 118(6)(b) of the
New Business Tax System (Debt and Equity) Act 2001
does not apply.
(3)
For the purposes of subitem (2), an interest is taken to be issued on or after 1 July 2001 if:
(a)
the interest is issued on or after that date; or
(b)
the interest is issued before that date, and:
(i)
the terms of the interest are altered on or after that date; or
(ii)
the interest is rolled over on or after that date; or
(iii)
the original term of the interest is extended on or after that date.
In applying subparagraph (b)(i), disregard:
(c)
minor alterations that do not affect rights and obligations in relation to the interest; and
(d)
alterations that permit or require any deferred payments under the interest to accumulate.
Application of debt and equity test amendments
(4)
Despite paragraph 118(6)(a) of the
New Business Tax System (Debt and Equity) Act 2001
, the debt and equity test amendments apply only to transactions that take place in relation to the interest on or after 1 July 2010 if the issuer of the interest does not make an election under paragraph 118(6)(b) of that Act.
(5)
If subitem (4) applies to an interest:
(a)
the interest is disregarded for the purposes of paragraph
164-10(1)(b)
and subsection
164-15(3)
of the
Income Tax Assessment Act 1997
; and
(b)
section
164-15
of the
Income Tax Assessment Act 1997
applies to the interest as if references in paragraph
164-15(3)(b)
and subsection
164-15(4)
to 1 July 2001 were references to 1 July 2010.
(6)
A reference in this item to a
transaction
includes a reference to:
(a)
making a return; and
(b)
paying a dividend or unit trust dividend; and
(c)
making a distribution in relation to a unit trust; and
(d)
paying, crediting or lending an amount; and
(e)
making a non-share distribution; and
(f)
forgiving a debt; and
(g)
redeeming, cancelling or buying back an interest; and
(h)
converting an interest.
Act No 163 of 2001, s 3 and Sch 1 item 118 (as amended by No 162 of 2005, s 3 and Sch 6 items 26 and 27), contained the following application provisions:
(1)
Definitions.
In this item:
CGT amendments
means the amendments made by items 7 to 32 of this Schedule.
debt and equity test amendments
means the amendments made by this Schedule (other than the CGT amendments).
(2)
Application of debt and equity test amendments.
The debt and equity test amendments apply to transactions that take place on or after 1 July 2001. This is so whether the interest in relation to which the transaction takes place was issued before, or is issued on or after, that date. This subitem has effect subject to subitem (6).
History
Subitem 118(2) amended by No 162 of 2005.
(3)
Application of the CGT amendments.
The amendments made by items 7 to 11 of this Schedule apply to:
(a)
equity interests issued or allotted; and
(b)
options granted;
on or after 1 July 2001.
(4)
The amendments made by items 12 to 32 of this Schedule apply to the conversion of a convertible interest, or the exercise of a right, on or after 1 July 2001.
(5)
Section 130-40 of the
Income Tax Assessment Act 1997
applies to all convertible notes acquired before 20 September 1985 as if they were convertible interests.
(6)
Application of debt and equity test amendments to interests issued before 1 July 2001.
If an interest was issued before 1 July 2001, the debt and equity test amendments:
(a)
apply only to transactions that take place in relation to the interest on or after 1 July 2004 if the issuer of the interest does not make an election under paragraph (b); and
(b)
apply to transactions that take place in relation to the interest on or after 1 July 2001 if the issuer elects to have this paragraph apply to the interest.
(7)
For the purposes of subitem (6), an interest is taken to be issued on or after 1 July 2001 if:
(a)
the interest is issued on or after that date; or
(b)
the interest is issued before that date; and:
(i)
the terms of the interest are altered on or after that date; or
(ii)
the interest is rolled over on or after that date; or
(iii)
the original term of the interest is extended on or after that date.
In applying subparagraph (b)(i), disregard minor alterations that do not affect rights and obligations in relation to the interest.
(9)
If paragraph (6)(a) applies to an interest:
(a)
paragraph
164-10(1)(b)
of the
Income Tax Assessment Act 1997
applies to the interest as if the second reference in that paragraph to
"
1 July 2001
"
were instead a reference to
"
1 July 2004
"
; and
(b)
section
164-15
of the
Income Tax Assessment Act 1997
applies to the interest as if the following references were instead references to
"
1 July 2004
"
:
(i)
the first reference in subsection
164-15(3)
to
"
1 July 2001
"
;
(ii)
the reference in subsection
164-15(3)
to
"
that day
"
;
(iii)
the references in paragraph
164-15(3)(b)
and subsection
164-15(4)
to
"
1 July 2001
"
.
History
Subitem 118(9) substituted by No 162 of 2005.
(10)
An election in relation to an interest is effective for the purposes of paragraph (6)(b) only if:
(a)
the election is lodged with the Commissioner within:
(i)
90 days after the day on which this Act receives the Royal Assent; or
(ii)
such further time as the Commissioner allows; and
(b)
an election under paragraph (6)(b) is made in relation to all other interests that:
(i)
were issued by the issuer before 1 July 2001; and
(ii)
are substantially similar to that interest and in relation to which an election under that subitem can be made; and
(c)
the election contains the following information:
(i)
the name of the issuer;
(ii)
the tax file number of the issuer;
(iii)
the legal form of the interest;
(iv)
ASX code or other stock exchange listing code allotted to the issue (if applicable);
(v)
the date of the issue;
(vi)
the face value of the issue;
(vii)
the number of interests of that kind on issue when the election is made;
(viii)
coupon/dividend rates and terms including contingencies;
(ix)
maturity details;
(x)
redemption details and terms including contingencies;
(xi)
conversion/exercise details.
An election under paragraph (6)(b) cannot be revoked.
(11)
The Commissioner may allow further time under subparagraph (10)(a)(ii) if he or she:
(a)
is satisfied that the issuer would otherwise not have sufficient opportunity to make the election; or
(b)
otherwise considers it reasonable to do so.
(12)
If:
(a)
paragraph (6)(a) applies to an interest; and
(b)
on or after 1 July 2001 and before 1 July 2004:
(i)
the terms of the interest are altered; or
(ii)
the interest is rolled over; or
(iii)
the original term of the interest is extended;
then:
(c)
the debt and equity test amendments apply to the transactions in relation to the interest that take place after the event referred to in paragraph (b) occurs; and
(d)
subitem (9) applies to the interest as if references in that subitem to 1 July 2004 were references to the time when that event occurs.
In applying subparagraph (b)(i), disregard minor alterations that do not affect rights and obligations in relation to the interest.
(13)
A reference in this item to a
transaction
includes a reference to:
(a)
making a return; and
(b)
paying a dividend or unit trust dividend; and
(c)
making a distribution in relation to a unit trust; and
(d)
paying, crediting or lending an amount; and
(e)
making a non-share distribution; and
(f)
forgiving a debt; and
(g)
redeeming, cancelling or buying back an interest; and
(h)
converting an interest.
Subdivision 974-C
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Equity interests in companies
SECTION 974-75
The test for an equity interest
Basic test for equity interest
974-75(1)
A *scheme satisfies the equity test in this subsection in relation to a company if it gives rise to an interest set out in the following table:
|
Equity interests
|
|
Item
|
Interest
|
| 1 |
An interest in the company as a member or stockholder of the company. |
|
|
| 2 |
An interest that carries a right to a variable or fixed return from the company if either the right itself, or the amount of the return, is in substance or effect *contingent on aspects of the economic performance (whether past, current or future) of: |
| |
(a) |
the company; or |
| |
(b) |
a part of the company
'
s activities; or |
| |
(c) |
a *connected entity of the company or a part of the activities of a connected entity of the company. |
| |
The return may be a return of an amount invested in the interest. |
|
|
| 3 |
An interest that carries a right to a variable or fixed return from the company if either the right itself, or the amount of the return, is at the discretion of: |
| |
(a) |
the company; or |
| |
(b) |
a *connected entity of the company. |
| |
The return may be a return of an amount invested in the interest. |
|
|
| 4 |
An interest issued by the company that: |
| |
(a) |
gives its holder (or a *connected entity of the holder) a right to be issued with an *equity interest in the company or a *connected entity of the company; or |
| |
(b) |
is an *interest that will, or may, convert into an equity interest in the company or a connected entity of the company. |
This subsection has effect subject to subsection (2) (requirement for financing arrangement).
Note:
Section
974-90
allows regulations to be made clarifying when a right or return is taken to be at discretion of a company or connected entity.
History
S 974-75(1) amended by No 10 of 2016, s 3 and Sch 1 item 23, by substituting
"
*contingent on aspects of the economic performance
"
for
"
*contingent on the economic performance
"
in table item 2, applicable in relation to look-through earnout rights created on or after 24 April 2015. For transitional provision, see note under Subdiv
118-I
heading.
Financing arrangement
974-75(2)
A *scheme that would otherwise give rise to an *equity interest in a company because of an item in the table in subsection (1) (other than item 1) does not give rise to an equity interest in the company unless the scheme is a *financing arrangement for the company.
Form interest may take
974-75(3)
The interest referred to in item 2, 3 or 4 in the table in subsection (1) may take the form of a proprietary right, a chose in action or any other form.
Exception for certain at call loans
-
until 30 June 2005
974-75(4)
If:
(a)
a *financing arrangement takes the form of a loan to a company by a *connected entity; and
(b)
the loan does not have a fixed term; and
(c)
either:
(i)
the loan is repayable on demand made by the connected entity, and repayment is required immediately on the making of the demand, or is required at the end of a particular period after the demand is made (being a period that is not longer than is reasonably necessary to arrange repayment); or
(ii)
the loan is repayable on the death of the connected entity (if the connected entity is an individual); and
(d)
the arrangement was entered into on or before 30 June 2005;
the arrangement does not give rise to an
equity interest
in the company. Instead, the arrangement is taken, despite anything in Subdivision
974-B
, to give rise to a
debt interest
in the company. This subsection ceases to have effect on 1 July 2005.
Note:
If this subsection ceases to have effect in relation to an interest that is, according to the other provisions of this Division, an equity interest immediately after the cessation, an adjustment to the company
'
s non-share capital account will occur at that time (see subsection
164-15(2)
).
History
S 974-75(4) amended by No 162 of 2005, s 3 and Sch 6 item 7, by inserting the note at the end, applicable to:
(a) schemes entered into on or after 1 July 2005; and
(b) schemes entered into before 1 July 2005, in so far as they continue to exist on and after 1 July 2005.
S 974-75(4) amended by No 162 of 2005, s 3 and Sch 6 item 6, by substituting para (c), applicable in accordance with item 118 of Schedule 1 to the
New Business Tax System (Debt and Equity) Act 2001
, as though the amendment were one of the
debt and equity test amendments
within the meaning of item 118 of that Schedule. Para (c) formerly read:
(c)
under the arrangement the loan is repayable on demand by the connected entity; and
S 974-75(4) amended by No 23 of 2005.
974-75(5)
If, while subsection (4) applies to a *financing arrangement, a circumstance occurs that would otherwise have attracted the operation of subsection
974-110(1)
or
(2)
in relation to the arrangement:
(a)
that subsection of section
974-110
does not apply to change the result that subsection (4) of this section produces in relation to the arrangement; but
(b)
for the purpose of applying this Division in relation to the arrangement after subsection (4) of this section has ceased to have effect, that subsection of section
974-110
is taken to have produced the result that it would have produced if subsection (4) of this section had not applied to the arrangement.
History
S 974-75(5) inserted by No 162 of 2005, s 3 and Sch 6 item 22, applicable in accordance with item 118 of Schedule 1 to the
New Business Tax System (Debt and Equity) Act 2001
, as though those amendments were
debt and equity test amendments
within the meaning of item 118 of that Schedule.
Further exception for certain related party at call loans
974-75(6)
In applying this Division in relation to a particular *scheme and a particular income year (which may be the income year in which the scheme is entered into or a later income year), the scheme is taken not to give rise to an
equity interest
in a company, and instead to give rise to a
debt interest
in the company, if:
(a)
the scheme takes the form of a loan to the company that satisfies paragraphs (4)(a), (b) and (c); and
(b)
the company
'
s *GST turnover (worked out at the end of the income year) is less than $20,000,000.
Note:
If this subsection does not apply in relation to the previous income year or the next income year, and the scheme gives rise to an equity interest according to the other provisions of this Division, an adjustment to the company
'
s non-share capital account will occur at the end of the previous income year or the start of the next income year (see subsections
164-15(2)
and
164-20(3)
).
History
S 974-75(6) amended by
No 80 of 2007
, s 3 and Sch 2 item 61, by substituting
"
*GST turnover
"
for
"
annual turnover
"
in para (b), applicable in relation to the 2007-08 income year and later income years.
S 974-75(6) inserted by No 162 of 2005, s 3 and Sch 6 item 8, applicable to:
(a) schemes entered into on or after 1 July 2005; and
(b) schemes entered into before 1 July 2005, in so far as they continue to exist on and after 1 July 2005.
974-75(7)
For the purpose of paragraph (6)(b), the question whether a company
'
s *GST turnover (worked out at the end of an income year) is less than $20,000,000 is to be determined in accordance with subsection
188-10(2)
of the *GST Act, as if that amount of $20,000,000 were a turnover threshold for the purposes of that subsection of the GST Act.
History
S 974-75(7) amended by
No 80 of 2007
, s 3 and Sch 2 item 62, by substituting
"
*GST turnover
"
for
"
annual turnover
"
, applicable in relation to the 2007-08 income year and later income years.
S 974-75(7) inserted by No 162 of 2005, s 3 and Sch 6 item 8, applicable to:
(a) schemes entered into on or after 1 July 2005; and
(b) schemes entered into before 1 July 2005, in so far as they continue to exist on and after 1 July 2005.
S 974-75 inserted by No 163 of 2001. For application provisions, see note under Div 974 heading.
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