Tax Laws Amendment (2005 Measures No. 5) Act 2005 (162 of 2005)

Schedule 6   Debt and equity interests

Part 1   Related party at call etc. loans

Income Tax Assessment Act 1997

11   After subsection 974-110(1)

Insert:

Change to existing scheme - special rule for changing a related party at call etc. loan to a private company from equity to debt

(1A) If:

(a) a *scheme takes the form of a loan that satisfies paragraphs 974-75(4)(a), (b) and (c); and

(b) the scheme gives rise to an *equity interest (disregarding the effect this subsection has on the characterisation of the interest because of the change referred to in paragraph (c) of this subsection); and

(c) the scheme is subsequently changed; and

(d) the change occurs in the period starting immediately after the end of a particular income year (the year of effect ) and ending at the end of the earlier of the following days:

(i) the due date for lodgment of the company's return of income for the year of effect;

(ii) the date of lodgment of the company's return of income for the year of effect; and

(e) the scheme, as it exists immediately after the change, would give rise to a *debt interest in the company if the interest came into existence when the change occurred; and

(f) the company is a *private company in relation to the year of effect; and

(g) subsection 974-75(6) does not apply in relation to the loan and the year of effect; and

(h) the company elects that this subsection is to apply to the change;

this Division applies as if the scheme, as it exists immediately after the change, had come into existence at the start of the year of effect, and as if no other change of a kind referred to in subsection (1) had occurred in relation to the interest in the period commencing at the start of the year of effect and ending when the first-mentioned change was made.

Note 1: This will mean that:

(a) the characterisation of the interest will change, with effect back to the start of the year of effect; and

(b) that characterisation will not be affected by other changes that occurred after the start of the year of effect and before the change to which this subsection applies.

Note 2: This section can apply to an interest a number of times so that, for example, an interest that is an equity interest when issued may change to debt because of one subsequent change and then back to equity because of a later change.

Note 3: An adjustment to the company's non-share capital account will be taken to have occurred at the start of the year of effect (see subsection 164-20(3)).

(1B) An election for the purposes of paragraph (1A)(h):

(a) must be in writing; and

(b) can only be made in the period referred to in paragraph (1A)(d); and

(c) cannot be revoked.