Income Tax Assessment Act 1997

CHAPTER 4 - INTERNATIONAL ASPECTS OF INCOME TAX  

PART 4-5 - GENERAL  

Division 820 - Thin capitalisation rules  

Subdivision 820-EAB - Third party debt concepts  

Operative provisions

SECTION 820-427A   Meaning of third party earnings limit and third party debt conditions  

820-427A(1)    
An entity ' s third party earnings limit for an income year is the sum of each * debt deduction of the entity for the income year (disregarding this Division) that is attributable to a * debt interest issued by the entity that satisfies the * third party debt conditions in relation to the income year.

820-427A(2)    
For the purposes of subsection (1) , treat a *debt deduction of an entity as being attributable to a *debt interest issued by the entity to the extent that:

(a)    the debt deduction is directly associated with hedging or managing the interest rate risk in respect of the debt interest; and

(b)    the debt deduction is not referable to an amount paid or payable, directly or indirectly, to an *associate entity (see section 820-427D ) of the entity.

820-427A(3)    
A * debt interest issued by an entity satisfies the third party debt conditions in relation to an income year if the following conditions are satisfied:

(a)    the entity issued the debt interest to an entity that is not an * associate entity (see section 820-427D ) of the entity;

(b)    the debt interest is not held at any time in the income year by an entity that is an associate entity of the entity;

(c)    disregarding recourse to minor or insignificant assets, the holder of the debt interest has recourse for payment of the debt to which the debt interest relates only to Australian assets that:

(i) are covered by subsection (4) ; and

(ii) are not rights covered by subsection (5) (about credit support rights);

(d)    the entity uses all, or substantially all, of the proceeds of issuing the debt interest to fund its commercial activities in connection with Australia that do not include:

(i) any * business carried on by the entity at or through its * overseas permanent establishments; and

(ii) the holding by the entity of any * associate entity debt, * controlled foreign entity debt or * controlled foreign entity equity;

(e)    the entity is an *Australian entity (see section 820-427E ).

820-427A(4)    
This subsection covers Australian assets that:

(a)    are held by the entity; or

(b)    are *membership interests in the entity (unless the entity has a legal or equitable interest, whether directly or indirectly, in an asset that is not an Australian asset); or

(c)    are held by an *Australian entity that is a *member of the *obligor group in relation to the *debt interest.

820-427A(5)    
This subsection covers a right under or in relation to a guarantee, security or other form of credit support, other than a right that:

(a)    is any of the following:

(i) a right that provides recourse, directly or indirectly, only to one or more Australian assets covered by subsection (4) that are not rights covered by this subsection;

(ii) a right that, assuming that the holder of the right exercised the right, would not reasonably be expected to allow, directly or indirectly, the holder or another entity to have recourse for payment of the debt mentioned in paragraph (3)(c) against an *associate entity (see section 820-427D ) of the entity that issued that debt interest;

(iii) a right that relates wholly to the creation or development of a *CGT asset that is, or is reasonably expected to be, land situated in Australia (including an interest in land, if the land is situated in Australia);

(iv) a right that relates wholly to the creation or development of a CGT asset that is, or is reasonably expected to be, moveable property situated, or to be situated, on land of a kind mentioned in subparagraph (iii) , where that moveable property is, or is reasonably expected to be, relevant to the income producing use of the land and situated on the land for the majority of its useful life;

(v) a right that relates wholly to the creation or development of a CGT asset that is, or is reasonably expected to be, offshore renewable energy infrastructure (within the meaning of the Offshore Electricity Infrastructure Act 2021 ) situated, or to be situated, in a declared area (within the meaning of that Act) for the majority of its useful life;

(vi) a right that relates wholly to the creation or development of a CGT asset that is, or is reasonably expected to be, offshore electricity transmission infrastructure (within the meaning of the Offshore Electricity Infrastructure Act 2021 ) that is directly related to offshore renewable energy infrastructure covered by subparagraph (v) ; and

(b)    assuming that the holder of the right exercised the right, the right would not reasonably be expected to allow, directly or indirectly, the holder or another entity to have recourse for payment of the debt mentioned in paragraph (3)(c) of this section against a *foreign entity that is an *associate entity of the entity that issued the *debt interest.

820-427A(6)    
For the purposes of subparagraphs (5)(a)(iii) , (iv) , (v) and (vi) , in determining whether a right relates wholly to the creation or development of a *CGT asset of a kind mentioned in the relevant subparagraph, disregard the extent (if any) to which the right relates incidentally to another matter.