New Business Tax System (Thin Capitalisation) Act 2001 (162 of 2001)

Schedule 1   Thin capitalisation rules

Part 2   Consequential and other amendments

Income Tax (Transitional Provisions) Act 1997

22   After Division 405

Insert:

Chapter 4 - International aspects of income tax

Part 4-5 - General

[The next Division is Division 820.]

Division 820 - Application of the thin capitalisation rules

Table of sections

820-10 Application of Division 820 of the Income Tax Assessment Act 1997

820-12 Application of Division 974 of the Income Tax Assessment Act 1997 for the purposes of Division 820 of that Act

820-15 Transitional provision - application of Divisions 16F and 16G of Part III of the Income Tax Assessment Act 1936

820-20 Transitional provision - application of section 389 of the Income Tax Assessment Act 1936

820-25 Transitional provision - average value of a matter for the first income year

820-30 Transitional provision - average value of a matter for resident TC group that includes an ADI or an Australian permanent establishment of a foreign bank

820-35 Transitional provision - transitional debt interests

820-40 Transitional provision - transitional equity interests

820-10 Application of Division 820 of the Income Tax Assessment Act 1997

(1) Subject to subsection (2), Division 820 of the Income Tax Assessment Act 1997 applies in relation to an income year that begins on or after 1 July 2001.

(2) Subdivision 820-L of that Act, to the extent that it relates to the requirements under section 820-960 of that Act, applies only in relation to an income year that begins on or after 1 July 2002.

820-12 Application of Division 974 of the Income Tax Assessment Act 1997 for the purposes of Division 820 of that Act

(1) Division 974 of the Income Tax Assessment Act 1997 applies for the purposes of determining whether, for the purposes of Division 820 of that Act, an interest is a debt interest or an equity interest at any time on or after 1 July 2001 (whether or not the debt and equity test amendments apply to transactions in relation to that interest at that time).

(2) In this section, debt and equity test amendments has the same meaning as in Part 4 of Schedule 1 to the New Business Tax System (Debt and Equity) Act 2001.

820-15 Transitional provision - application of Divisions 16F and 16G of Part III of the Income Tax Assessment Act 1936

If Division 16F or 16G of Part III of the Income Tax Assessment Act 1936 would have applied to an entity for a period that is all or a part of an income year that begins before 1 July 2001, then, despite the repeal of that Division, it continues to apply to that entity for that period.

820-20 Transitional provision - application of section 389 of the Income Tax Assessment Act 1936

If Division 16F or 16G of Part III of the Income Tax Assessment Act 1936 continues to apply to an entity for a period under section 820-15, section 389 of that Act applies to that entity for that period as if that section has not been amended by the New Business Tax System (Thin Capitalisation) Act 2001.

820-25 Transitional provision - average value of a matter for the first income year

(1) If:

(a) Division 820 of the Income Tax Assessment Act 1997 applies to an entity for a period that is all or a part of an income year; and

(b) that income year begins before 1 July 2002 and ends before 30 June 2003;

the entity may, for the purposes of that application, choose to use the value of a particular matter as at the end of that period as if it were the average value of that matter for that period.

Note: This means that the entity may, for that period, apply subsection (1) instead of calculating an average value in accordance with Subdivision 820-G of the Income Tax Assessment Act 1997.

(2) However, an entity making that choice must apply subsection (1) throughout that period for every matter for which an average value is required to be calculated for the purposes of that Division's application to that entity.

(3) This section alters the effect of that Division accordingly.

820-30 Transitional provision: average value of a matter for a resident TC group that includes an ADI or an Australian permanent establishment of a foreign bank

(1) This section affects how the average value of a matter is determined for the purposes of Division 820 of the Income Tax Assessment Act 1997, as it applies to a resident TC group for an income year beginning before 1 July 2002 and ending before 30 June 2003.

(2) If:

(a) the group is an outward investing entity (ADI) for that income year, or section 820-565 of that Act applies Subdivision 820-D of that Act to the group for that income year as if it were an outward investing entity (ADI); and

(b) apart from this section, a day on which the group did not include at least one entity that is an ADI would be a measurement day for the group under section 820-645 of that Act;

that day is treated as not being such a measurement day.

(3) If:

(a) section 820-575 of that Act applies Subdivision 820-E of that Act to the group for that income year as if it were an inward investing entity (ADI); and

(b) apart from this section, a day on which the group did not include at least one Australian permanent establishment through which a foreign bank carries on its banking business in Australia would be a measurement day for the group under section 820-645 of that Act;

that day is treated as not being such a measurement day.

820-35 Transitional provision - transitional debt interests

(1) This section applies to an interest for the period starting from 1 July 2001 and ending immediately before 1 July 2004 (the transitional period ) if:

(a) the interest was issued before 1 July 2001; and

(b) disregarding the debt and equity test amendments (within the meaning of Part 4 of Schedule 1 to the New Business Tax System (Debt and Equity) Act 2001), the interest would be:

(i) an asset of an entity comprised by equity issued by another entity; or

(ii) equity issued by an entity to another entity; and

(c) the interest is a debt interest that remains on issue.

What happens if there is no election

(2) If:

(a) the issuer of the interest does not elect under paragraph 118(6)(b) of Schedule 1 to the New Business Tax System (Debt and Equity) Act 2001 to have that paragraph apply to the interest; and

(b) at any time during the transitional period, Division 820 of the Income Tax Assessment Act 1997 applies to an entity that is the issuer or the holder of the interest;

the interest must be treated as an equity interest for the purposes of applying that Division to that entity at that time.

What happens if there is an election

(3) Subsections (4) to (6) apply if the issuer of the interest elects under paragraph 118(6)(b) of Schedule 1 to the New Business Tax System (Debt and Equity) Act 2001 to have that paragraph apply to the interest.

(4) For the purposes of applying Division 820 of the Income Tax Assessment Act 1997 at any time during the transitional period to an entity that is the issuer of the interest at that time, the interest must be treated as a debt interest at that time.

(5) Except as provided by subsection (6), for the purposes of applying that Division at any time during the transitional period to an entity that is the holder of the interest at that time, the interest must be treated as an equity interest at that time.

(6) Despite subsection (5), the interest must be treated as a debt interest at that time for the purposes of applying that Division to that holder at that time if:

(a) apart from this section, the interest would be included in the associate entity debt of that holder at that time for those purposes; and

(b) at that time, the issuer of the interest is not an Australian controlled foreign entity for which that holder is an Australian controller.

820-40 Transitional provision - transitional equity interests

(1) This section applies to an interest for the period starting from 1 July 2001 and ending immediately before 1 July 2004 (the transitional period ) if:

(a) the interest was issued before 1 July 2001; and

(b) disregarding the debt and equity test amendments (within the meaning of Part 4 of Schedule 1 to the New Business Tax System (Debt and Equity) Act 2001), the interest would be:

(i) an asset of an entity comprised by a debt owed to the entity by the issuer of the interest; or

(ii) a debt owed by the issuer of the interest to another entity; and

(c) the interest is an equity interest.

For the issuer

(2) The interest must be treated as an equity interest at any time during the transitional period for the purposes of applying Division 820 of the Income Tax Assessment Act 1997 to an entity that is the issuer of that interest at that time.

For the holder

(3) Except as provided by subsection (4), the interest must be treated as a debt interest at any time during the transitional period for the purposes of applying that Division to an entity that is the holder of the interest at that time.

(4) Despite subsection (3), that interest must be treated as an equity interest at that time for the purposes of applying that Division to that holder at that time if:

(a) apart from this section, the interest would be included in the associate entity equity of that holder at that time for those purposes; and

(b) at that time, the issuer of the interest is not an Australian controlled foreign entity for which that holder is an Australian controller.