Taxation Laws Amendment Act (No. 3) 1992 (98 of 1992)

Part 2   AMENDMENT OF THE INCOME TAX ASSESSMENT ACT 1936

Division 5   Amendments relating to debts

27   After section 63D

After section 63D of the Principal Act, the following sections are inserted:

Debt/equity swaps

(Meaning of "debt/equity swap")

"63E.(1) For the purposes of this section, a 'debt/equity swap' occurs if:

(a) under an arrangement (defined in subsection (6)), a taxpayer discharges, releases or otherwise extinguishes the whole or part of a debt owed to the taxpayer in return for the issue by the debtor to the taxpayer of shares (other than redeemable preference shares), or units, in the debtor; and

(b) the debtor is:

(i) a company; or

(ii) a trading trust (within the meaning of section 102N), or a public unit trust (within the meaning of section 102P), in relation to the year of income in which the units are issued; and

(c) the debt either:

(i) has been brought to account by the taxpayer as assessable income of any year of income; or

(ii) is in respect of money lent in the ordinary course of the business of the lending of money by the taxpayer who carries on that business.

(Meaning of "equity value" and "swap loss")

"(2) For the purposes of this section:

(a) the 'equity value' of the shares or units is the greater of:

(i) their market value at the time of their issue to the taxpayer; and

(ii) their value shown in the accounts of the taxpayer as at the time of their issue to the taxpayer; and

(b) a 'swap loss' occurs if the amount of the whole or the part of the debt that is extinguished is greater than the equity value of the shares or units.

(Swap loss is deductible etc.)

"(3) If a debt/equity swap occurs:

(a) subject to section 63F, any swap loss is allowable as a deduction from the taxpayer's assessable income of the year of income in which the shares or units are issued; and

(b) no amount is allowable as a deduction from the assessable income of the taxpayer of any year of income under section 51 or 63 in respect of the writing off of the whole or part of the debt as bad in connection with the debt/equity swap; and

(c) for the purposes of any application of subsection 63(3) in relation to the issue of the shares or units to the taxpayer, the amount received in respect of the issue is taken to be the same as the equity value of the shares or units.

(Effect of debt/equity swap on later equity disposal etc.)

"(4) If a debt/equity swap occurs and the taxpayer later disposes of any of the shares or units or they are cancelled or redeemed:

(a) except in accordance with paragraph (b), no amount is included in, or allowable as a deduction from, the taxpayer's assessable income of any year of income under this Act in respect of the later disposal, cancellation or

redemption; and

(b) if the consideration received or receivable by the taxpayer in respect of the disposal, cancellation or redemption is different from the equity value of the shares or units:

(i) if the consideration is greater - the difference is included in the taxpayer's assessable income of the year of income in which the disposal, cancellation or redemption occurs; or

(ii) if it is less - the difference is allowable as a deduction from that assessable income.

(Consideration of a nil amount)

"(5) For the purposes of subsection (4), if no consideration is received or receivable by the taxpayer in respect of the disposal, cancellation or redemption, then consideration of a nil amount is taken to have been so received or receivable.

(Meaning of "arrangement")

"(6) In this section: 'arrangement' means any agreement, arrangement, understanding, promise, undertaking or scheme, whether express or implied, and whether or not enforceable, or intended to be enforceable, by legal proceedings.

Limit on deductions where debt write offs and debt/equity swaps occur

(Situations where limit is to be applied)

"63F.(1) If:

(a) apart from this section, a deduction ('the current deduction') would be allowable to a taxpayer:

(i) under section 51 or 63 in respect of the writing off of the whole or part of a debt as bad; or

(ii) under section 63E in respect of a debt/equity swap relating to the whole or part of a debt; and

(b) a deduction ('a previous deduction') was allowed or allowable to the taxpayer under any of those sections in respect of any number of occurrences of either or both of the following:

(i) a previous writing off as bad of the whole or part of a debt ('a previous debt') that was the same as, or included, the debt mentioned in subparagraph (a)(i) or (ii);

(ii) a previous debt/equity swap relating to a part of a debt ('a previous debt') that was the same as, or included, the debt mentioned in subparagraph (a)(i) or (ii); and

(c) the current deduction or at least one previous deduction is a deduction allowable under section 63E in respect of a debt/equity swap;

then the current deduction is only allowable to the extent that it does not exceed the limit worked out under subsection (2).

(Calculation of limit)

"(2) The limit is worked out as follows:

Step 1: Take the amount of the previous debt in respect of the earliest or only writing off or debt/equity swap to which paragraph (1)(b) applies.

Step 2: Reduce the amount by the previous deduction in respect of that writing off or debt/equity swap.

Step 3: If one or more of the following events occur after the writing off or debt/equity swap, progressively reduce the balance of the amount in the way set out below and in the order in which the events occur:

Event

How balance reduced

A writing off or debt/equity swap in respect of which there is a previous deduction.

Reduce the balance by the amount of that previous deduction. If the reduced balance is higher than the level of the debt owing after the event, further reduce the balance to that lower level.

Any other event (e.g. a repayment) that reduces the amount of debt owing, being an event that occurs before the writing off or debt/equity swap in respect of the current deduction.

If the balance at the time of the event is higher than the level of the debt owing after the event occurs, reduce the balance to that lower level.

The limit is the resulting balance.".