Income Tax Assessment Act 1997

CHAPTER 4 - INTERNATIONAL ASPECTS OF INCOME TAX  

PART 4-5 - GENERAL  

Division 820 - Thin capitalisation rules  

Subdivision 820-EAA - Debt deduction limitation rules for debt deduction creation (all relevant entities)  

Operative provisions

SECTION 820-423A   Debt deduction limitation rule for debt deduction creation (all relevant entities)  

Debt deduction limitation rule

820-423A(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

820-423A(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 * associate pair 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.

820-423A(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.

820-423A(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.

820-423A(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

820-423A(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.

820-423A(5A)    
This subsection covers the following:

(a)    a *dividend, *distribution or *non-share distribution;

(b)    a distribution by 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.

820-423A(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.

820-423A(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.