New Business Tax System (Consolidation and Other Measures) Act (No. 1) 2002 (117 of 2002)

Schedule 13   Consolidation: thin capitalisation

Income Tax Assessment Act 1997

3   After Subdivision 820-F

Insert:

Subdivision 820-FA - How the thin capitalisation rules apply to consolidated groups and MEC groups

Guide to Subdivision 820-FA

820-579 What this Subdivision is about

This Subdivision tells you:

• how to classify the head company of a consolidated group or MEC group (in terms of which Subdivision of this Division to apply to the head company); and

• how to apply this Division to the head company (including how the application is modified).

Table of sections

Operative provisions

820-581 How this Division applies to head company for income year in which group comes into existence or ceases to exist

820-583 Classification of head company

820-585 Exemption for consolidated group headed by foreign-controlled Australian ADI or its holding company

820-587 Additional application of Subdivision 820-D to MEC group that includes foreign-controlled Australian ADI

820-589 How Subdivision 820-D applies to consolidated group or MEC group

820-591 Effect on safe harbour capital amount if group member is foreign-controlled Australian ADI and on-lends section 128F amounts

[This is the end of the Guide.]

Operative provisions

820-581 How this Division applies to head company for income year in which group comes into existence or ceases to exist

If a*consolidated group or*MEC group:

(a) comes into existence at a time during an income year that is not the start of the income year; or

(b) ceases to exist at a time during an income year that is not the end of the income year;

then, for each of the following periods during that income year:

(c) a period throughout which a company is the*head company of that group; or

(d) a period throughout which that company is the head company of a different consolidated group or MEC group; or

(e) a period throughout which that company is a*member of no consolidated group or MEC group;

this Division (except this section) is to have either:

(f) a single application in relation to the whole of the period; or

(g) 2 or more applications, each in relation to a part of that period.

Example: Austco Ltd is not a member of a consolidated group for the first 6 months of an income year, but then becomes the head company of a consolidated group which continues in existence for the rest of the income year.

For those first 6 months Austco is an outward investor (general) under section 820-85. For the rest of the income year Austco is an outward investor (general) under subsection 820-583(2).

This section ensures that section 820-120 (about part year periods) applies to Austco instead of section 820-85, so that Subdivision 820-B has 2 separate applications to Austco: one for the first 6 months and the other for the rest of the income year. Under the second application, account is taken of the position of the subsidiary members that are taken to be part of Austco as head company of the consolidated group.

If some or all of the period of those first 6 months is before 1 July 2003, another consequence of this section is that Austco may become part of a resident TC group under Subdivision 820-F for so much of that period as is before 1 July 2003. See sections 820-455 to 820-458.

820-583 Classification of head company

Outward investing entity (non-ADI)

(1) The*head company of a*consolidated group or of a*MEC group is an outward investing entity (non-ADI) for a period that is all or part of an income year if, and only if, it is:

(a) an*outward investor (general) for that period (because of subsection (2)); or

(b) an*outward investor (financial) for that period (because of subsection (3)).

Outward investor (general)

(2) The*head company of a*consolidated group or of a*MEC group is an outward investor (general) for a period that is all or part of an income year if:

(a) for that period, the head company satisfies the condition in the second column of item 1 or 3 of the table in subsection 820-85(2); and

(b) no*member of the group is a*financial entity or*ADI at any time during that period.

Outward investor (financial)

(3) The*head company of a*consolidated group or of a*MEC group isan outward investor (financial) for a period that is all or part of an income year if:

(a) for that period, the head company satisfies the condition in the second column of item 1 or 3 of the table in subsection 820-85(2); and

(b) throughout that period, there is at least one*member of the group that is a*financial entity; and

(c) no*member of the group is an*ADI at any time during that period.

Inward investing entity (non-ADI)

(4) The*head company of a*consolidated group or of a*MEC group is an inward investing entity (non-ADI) for a period that is all or part of an income year if, and only if, it is:

(a) an*inward investment vehicle (general) for that period (because of subsection (5)); or

(b) an*inward investment vehicle (financial) for that period (because of subsection (6)).

Inward investment vehicle (general)

(5) The*head company of a*consolidated group or of a*MEC group is an inward investment vehicle (general) for a period that is all or part of an income year if:

(a) throughout that period, the head company is a*foreign controlled Australian entity; and

(b) no member of the group is a*financial entity or*ADI at any time during that period;

unless the head company is an*outward investing entity (non-ADI) for all or part of that period.

Inward investment vehicle (financial)

(6) The*head company of a*consolidated group or of a*MEC group is an inward investment vehicle (financial) for a period that is all or part of an income year if:

(a) throughout that period, the head company is a*foreign controlled Australian entity; and

(b) throughout that period, there is at least one*member of the group that is a*financial entity; and

(c) no member of the group is an*ADI at any time during that period;

unless the head company is an*outward investing entity (non-ADI) for all or part of that period.

Outward investing entity (ADI)

(7) The*head company of a*consolidated group or of a*MEC group is an outward investing entity (ADI) for a period that is all or part of an income year if, and only if:

(a) apart from Part 3-90 (about consolidation of groups) and this Subdivision, at least one*member of the group would be an*outward investing entity (ADI) for that period; or

(b) these conditions are met:

(i) at least one member of the group would, apart from that Part and this Subdivision, be an*outward investing entity (non-ADI) for that period; and

(ii) at least one member of the group is an*ADI throughout that period.

820-585 Exemption for consolidated group headed by foreign-controlled Australian ADI or its holding company

(1) This Division does not disallow any of a*debt deduction for an income year if:

(a) the debt deduction is of the*head company of a*consolidated group and the head company satisfies subsection (2) for that income year; or

(b) the debt deduction is an amount incurred by the head company of a consolidated group during a period that is part of that income year, and the head company satisfies subsection (2) for that period.

(2) The*head company satisfies this subsection for a period that is all or part of an income year if, throughout that period:

(a) the head company is both a*foreign controlled Australian company and an*ADI (and would also be an ADI apart from Part 3-90 (about consolidation of groups)); or

(b) the head company:

(i) is a*foreign controlled Australian company; and

(ii) beneficially owns all the*membership interests in a*member of the group that is both a*foreign controlled Australian entity and an*ADI throughout that period; and

(iii) would, apart from Part 3-90 (about consolidation of groups), have no other assets and no*debt capital;

unless at least one member of the group would, apart from that Part and this Subdivision, be an*outward investing entity (non-ADI) or*outward investing entity (ADI) for all or part of that period.

820-587 Additional application of Subdivision 820-D to MEC group that includes foreign-controlled Australian ADI

Subdivision 820-D applies to the*head company of a*MEC group as if it were an*outward investing entity (ADI) for a period that is all or part of an income year if:

(a) the head company isnot an outward investing entity (ADI) for that period; and

(b) throughout that period, at least one*member of the group is both a*foreign controlled Australian entity and an*ADI; and

(c) throughout that period, there is at least one*eligible tier-1 company of the*top company for the group that:

(i) is a member of the group; and

(ii) isnot an ADI; and

(iii) has no*wholly-owned subsidiary that is an ADI.

820-589 How Subdivision 820-D applies to consolidated group or MEC group

(1) This section has effect for the purposes of applying Subdivision 820-D to the*head company of a*consolidated group or of a*MEC group, in relation to a period (the test period ) that is all or part of an income year.

Note: Section 820-587 extends the application of Subdivision 820-D.

(2) The*head company's adjusted average equity capital for the test period is the average value, for the period, of the amount worked out under subsection (3).

Note: To calculate an average value for the purposes of this Division, see Subdivision 820-G.

(3) The amount worked out under this subsection as at a particular day is the total of the amounts worked out under the table below for each entity that is a*member of the group on that day. The amounts are to be worked out, so far as practicable, on the basis of the information that would be contained in a set of consolidated accounts:

(a) prepared, in accordance with the*accounting standard on consolidated accounts, as at the end of that day; and

(b) covering the members of the group as at the end of that day.

Note: This subsection does not depend on whether such a set of consolidated accounts was prepared, or had to be prepared, for other purposes.

820-591 Effect on safe harbour capital amount if group member is foreign-controlled Australian ADI and on-lends section 128F amounts

(1) Subsection (2) has effect for the purposes of working out the*safe harbour capital amount of the*head company of a*consolidated group or of a*MEC group for a period that is all or part of an income year, if:

(a) throughout that period, a*member (the ADI subsidiary ) of the group is both a*wholly-owned subsidiary of a*foreign bank and an*ADI; and

(b) the ADI subsidiary has:

(i) issued*debentures covered by section 128F (which exempts interest on the debentures from withholding tax) of theIncome Tax Assessment Act 1936; and

(ii) made proceeds of the debentures available to an*Australian permanent establishment of the foreign bank, as loans to the Australian permanent establishment, for use in its Australian business;

unless a choice by the head company under section 820-597 covers the Australian permanent establishment in relation to some or all of that period.

Note: The effect of such a choice is that the Australian permanent establishment is treated as part of the head company throughout the period covered by the choice. See subsection 820-603(3).

(2) The head company's*risk-weighted assets at a particular time during that period are reduced by the total amounts of proceeds of the debentures that are at that time so made available by the ADI subsidiary.

(3) To avoid doubt, a choice by the*head company under section 820-597 does not prevent subsection (2) of this section from having effect unless the choice covers the Australian permanent establishment in relation to some or all of that period.

(4) This section applies only to the 2002-2003 income year and to each of the next 3 income years.

Subdivision 820-FB - Grouping foreign bank branches with a consolidated group, MEC group or single Australian resident company

Guide to Subdivision 820-FB

820-595 What this Subdivision is about

If the head company of a consolidated group or MEC group is a member of the same wholly-owned group as a foreign bank, the head company can choose to treat as part of itself the foreign bank's Australian branches.

If an Australian company that cannot consolidate is a member of the same wholly-owned group as a foreign bank, the company can choose to treat as part of itself the foreign bank's Australian branches.

This Subdivision sets out the consequences of the choice for the application of the rest of this Division.

Note: Also, if an Australian company that cannot consolidate is both a wholly-owned subsidiary of a foreign bank and an ADI, the company's risk-weighted assets may be reduced by the proceeds of debentures if those proceeds have been on-lent to an Australian permanent establishment of the foreign bank, and interest on the debentures is exempt from withholding tax because of section 128F of theIncome Tax Assessment Act 1936. See section 820-617.

Table of sections

Choice to group with foreign bank branches

820-597 Choice by consolidated group or MEC group

820-599 Choice by single Australian resident company that is not part of a consolidatable group or potential MEC group

Effect of choice

820-601 Application

820-603 General

820-605 Effect on foreign bank if certain debt deductions disallowed

820-607 Effect on test periods under this Division

820-609 Effect on classification of head company or single company

820-611 Values to be based on what would be in consolidated accounts for group

820-613 How Subdivision 820-D applies if head company or single company is treated as including foreign bank branches

820-615 How Subdivision 820-E applies if head company or single company is treated as including foreign bank branches

820-617 Effect on safe harbour capital amount if single company is foreign-controlled Australian ADI and on-lends section 128F amounts

[This is the end of the Guide.]

Choice to group with foreign bank branches

820-597 Choice by consolidated group or MEC group

(1) The*head company of a*consolidated group or*MEC group may choose to have treated as part of itself, for the purposes of this Division, each*Australian permanent establishment through which a*foreign bank carried on its banking business in Australia from time to time during a period (the grouping period ) for which the conditions in subsection (2) are satisfied.

(2) The conditions are:

(a) the period began on or after 1 July 2002; and

(b) the period was all or part of an income year of the*head company; and

(c) the*consolidated group or*MEC group was in existence throughout the period; and

(d) throughout the period:

(i) the head company and the*foreign bank were members of the same*wholly-owned group; and

(ii) the foreign bank carried on its banking business in Australia through at least one*Australian permanent establishment.

(It does not matter whether or not the income year ends on the same day for the head company and the foreign bank.)

(3) The*head company cannot choose under subsection (1) a period that is part of a longer period for which the conditions in subsection (2) are satisfied.

820-599 Choice by single Australian resident company that is not part of a consolidatable group or potential MEC group

(1) A company (the single company ) may choose to have treated as part of itself, for the purposes of this Division, each*Australian permanent establishment through which a*foreign bank carried on its banking business in Australia from time to time during a period (also the grouping period ) for which the conditions in subsection (2) are satisfied.

(2) The conditions are:

(a) the period began on or after 1 July 2002; and

(b) the period was all or part of an income year of the single company; and

(c) throughout the period, the single company:

(i) was an*Australian entity; and

(ii) wasnot a*prescribed dual resident; and

(iii) wasnot a*member of a*consolidatable group; and

(iv) wasnot a member of a*potential MEC group; and

(d) throughout the period:

(i) the single company and the foreign bank were members of the same*wholly-owned group; and

(ii) the foreign bank carried on its banking business in Australia through at least one Australian permanent establishment.

(It does not matter whether or not the income year ends on the same day for the single company and the foreign bank.)

(3) The single company cannot choose under subsection (1) a period that is part of a longer period for which the conditions in subsection (2) are satisfied.

Effect of choice

820-601 Application

Sections 820-603 to 820-617 apply if a choice is made under section 820-597 or 820-599.

820-603 General

(1) The choice cannot be revoked in relation to the grouping period. It binds the*head company or the single company, as appropriate, and the*foreign bank.

(2) The rest of this section applies:

(a) to each*Australian permanent establishment through which the*foreign bank carried on its banking business in Australia at any time during the grouping period; and

(b) in relation to each time (the test time ) during the grouping period when the foreign bank carried on its banking business in Australia through that Australian permanent establishment.

(3) In the case of a choice under section 820-597, this Division (except Subdivision 820-FA, this Subdivision and Subdivision 820-L) applies as if, at the test time, the*Australian permanent establishment:

(a) had been part of the*head company; and

(b) hadnot been part of the*foreign bank; and

(c) were a*subsidiary member of the*consolidated group or*MEC group.

(4) In the case of a choice under section 820-599, this Division (except Subdivision 820-FA, this Subdivision and Subdivision 820-L) applies as if, at the test time:

(a) the*Australian permanent establishment had been part of the single company and hadnot been part of the*foreign bank; and

(b) the single company were a*consolidated group of which the single company was the*head company and the Australian permanent establishment was a*subsidiary member.

(5) In either case, without limiting subsection (3) or (4), this Division (except Subdivision 820-FA, this Subdivision and Subdivision 820-L) applies as if:

(a) the*Australian permanent establishment were an entity at that time; and

(b) each asset and liability of the*foreign bank at the test time that is attributable to the Australian permanent establishment were an asset or liability of the Australian permanent establishment at that time; and

(c) without limiting paragraph (b) of this subsection, each cost that:

(i) is a*debt deduction of the foreign bank incurred at the test time; and

(ii) is attributable to the Australian permanent establishment;

were a cost incurred by the Australian permanent establishment at that time;

For the effects of disallowing debt deductions, see section 820-605.

(6) However, the application of this Division because of this section is subject to the modifications set out in sections 820-607 to 820-617.

(7) For the purposes of this Division (as applying because of this Subdivision), this Act (except this Division) applies as if the matters referred to in subsections (3), (4) and (5) of this section were the case.

Note: For example, this means that a head company is treated for the purposes of this Division as if it had debt deductions based on the actual costs incurred by an Australian permanent establishment while it is treated as part of the head company because of this section.

820-605 Effect on foreign bank if certain debt deductions disallowed

If:

(a) apart from this Division, a*debt deduction would be a deduction of the*foreign bank for an income year; and

(b) this Division (as applying because of this Subdivision) disallows all or part of the deduction (treated as a deduction of the*head company or single company);

this section disallows the deduction of the foreign bank, or that part of it, as appropriate.

Note 1: This Division does not disallow a debt deduction that the foreign bank incurs during the grouping period and that consists of a cost that is:

· attributable to an Australian permanent establishment covered by the choice under section 820-597 or 820-599; and

· paid or owed to the head company or single company.

The cost is not a debt deduction of the head company or single company for the purposes of this Division as applying because of this Subdivision. This is because subsection 820-603(3) or (4) treats the Australian permanent establishment as being part of the head company or single company, so the cost is treated as being paid or owed by the head company or single company to itself.

Because subsection 820-603(3) or (4) also treats the Australian permanent establishment as not being part of the foreign bank, the cost is not a debt deduction of the foreign bank, so it is not disallowed by this Division as applying to the foreign bank.

Note 2: This Division also does not disallow a debt deduction that the head company or single company incurs during the grouping period and that consists of a cost that is:

· paid or owed to the foreign bank; and

· is attributable to an Australian permanent establishment covered by the choice under section 820-597 or 820-599.

The cost is not a debt deduction of the head company or single company for the purposes of this Division as applying because of this Subdivision. This is because subsection 820-603(3) or (4) treats the Australian permanent establishment as being part of the head company or single company, so the cost is treated as being paid or owed by the head company or single company to itself.

820-607 Effect on test periods under this Division

If, apart from this section, this Division (except this Subdivision) would have a single application to the*head company or single company, or to the*foreign bank, in relation to a period (the test period ) that:

(a) is all or part of an income year of that entity; and

(b) overlaps the grouping period;

this Division (except this section) is to have separate applications to that entity as follows:

(c) a single application in relation to the period of overlap; and

(d) a single application in relation to the part (if any) of the test period that is before the period of overlap; and

(e) a single application in relation to the part (if any) of the test period that is after the period of overlap.

820-609 Effect on classification of head company or single company

Classification as outward investing entity (ADI)

(1) The*head company or single company is an outward investing entity (ADI) for a period that is all or part of the grouping period, except:

(a) in the case of a choice under section 820-597 - a period for which subsection (2) of this section applies Subdivision 820-D to the head company as if it were an*outward investing entity (ADI); and

(b) in any case - a period for which the head company or single company is an*inward investing entity (ADI) because of subsection (3) of this section.

Foreign controlled groups treated as outward investing entity (ADI)

(2) Subdivision 820-D applies to the*head company as if it were an*outward investing entity (ADI) for a period (the test period ) that is all or part of the grouping period if, apart from this Subdivision:

(a) the head company would satisfy subsection 820-585(2) for the test period (triggering the exemption in section 820-585); or

(b) section 820-587 would apply Subdivision 820-D to the head company as if it were an*outward investing entity (ADI) for the test period.

Note: If paragraph (2)(a) is satisfied, the exemption in section 820-585 does not apply to the test period: see subsection (4) of this section.

Classification as inward investing entity (ADI)

(3) If, apart from this Subdivision, the*head company or single company would be an*inward investment vehicle (general), or an*inward investment vehicle (financial), for a period (the test period ) that is all or part of the grouping period, the head company or single company is an inward investing entity (ADI) for the test period.

Section overrides other classification provisions

(4) This section has effect despite any other provision of this Division.

820-611 Values to be based on what would be in consolidated accounts for group

(1) For the purposes of this Division as applying because of this Subdivision, the value or amount of a particular matter as at a particular time during the grouping period is to be worked out, so far as practicable, on the basis of the information that would be contained in a set of consolidated accounts:

(a) prepared, in accordance with the*accounting standard on consolidated accounts, as at that time; and

(b) covering the*consolidated group,*MEC group or single company, as appropriate, and each*Australian permanent establishment that section 820-603 treats as part of the*head company or single company at that time.

Note: This subsection does not depend on whether such a set of consolidated accounts was prepared, or had to be prepared, for other purposes.

(2) To avoid doubt, subsection (1) also applies to working out the value or amount, as at a particular time, of a matter mentioned in any of sections 820-613 to 820-617 (for example, an entity's tier 1 capital (within the meaning of the*prudential standards) or*paid-up share capital).

820-613 How Subdivision 820-D applies if head company or single company is treated as including foreign bank branches

(1) This section has effect for the purposes of applying Subdivision 820-D to the*head company or single company in relation to a period (the test period ) that is all or part of the grouping period.

Note: Subdivision 820-D can apply to the head company or single company because of subsection 820-609(1) or (2).

Adjusted average equity capital

(2) The adjusted average equity capital of the*head company or single company for the test period is the average value, for the period, of the amount worked out under subsection (3).

Note 1: In the case of a choice under section 820-599, paragraph 820-603(4)(b) treats the single company and the relevant Australian permanent establishments as a consolidated group.

Note 2: To calculate an average value for the purposes of this Division, see Subdivision 820-G.

(3) The amount worked out under this subsection as at a particular day is the total of:

(a) in the case of a choice under section 820-597 - the amounts worked out under the table in subsection 820-589(3) for that day for each entity that is a*member of the group on that day; and

(b) in the case of a choice under section 820-599 - the amount worked out under the table in subsection 820-589(3) for that day for the single company; and

(c) for each*Australian permanent establishment covered by the choice - the*equity capital of the foreign bank, as at the end of that day, that:

(i) is attributable to that Australian permanent establishment; but

(ii) has not been allocated to the*OB activities of the foreign bank;

plus the total of the amounts that, as at the end of that day:

(iii) are made available by the foreign bank to the Australian permanent establishment as loans to the Australian permanent establishment; and

(iv) do not give rise to any*debt deductions of the foreign bank for the income year or any other income year.

Note: The amounts are to be worked out, so far as practicable, on the basis of the information that would be contained in a set of consolidated accounts. See section 820-611.

Risk-weighted assets

(4) For each*Australian permanent establishment that is treated covered by the choice, the*risk-weighted assets of the*head company or single company include that part of the foreign bank's*risk-weighted assets that:

(a) is attributable to that Australian permanent establishment; but

(b) is not attributable to the*OB activities of the foreign bank.

820-615 How Subdivision 820-E applies if head company or single company is treated as including foreign bank branches

(1) This section has effect for the purposes of applying Subdivision 820-E to the*head company or single company in relation to a period (the test period ) that is all or part of the grouping period.

Note: Subdivision 820-E applies to the head company or single company because of subsection 820-609(3).

Average equity capital

(2) The average equity capital of the*head company or single company for the test period is the average value, for that period, of the amount worked out under subsection 820-613(3).

Note 1: In the case of a choice under section 820-599, paragraph 820-603(4)(b) treats the single company and the relevant Australian permanent establishments as a consolidated group.

Note 2: To calculate an average value for the purposes of this Division, see Subdivision 820-G.

Safe harbour capital amount

(3) The safe harbour capital amount of the*head company or single company for the test period is worked out using the following method statement.

Method statement

Step 1. Work out the average value, for the test period, of the*head company's or single company's*risk-weighted assets.

Step 2. Multiply the result of step 1 by 4%. The result of this step is the safe harbour capital amount .

Risk-weighted assets

(4) For each*Australian permanent establishment covered by the choice, the*risk-weighted assets of the*head company or single company include that part of the*risk-weighted assets of the*foreign bank that:

(a) is attributable to that Australian permanent establishment; but

(b) is not attributable to the*OB activities of the foreign bank.

820-617 Effect on safe harbour capital amount if single company is foreign-controlled Australian ADI and on-lends section 128F amounts

(1) In the case of a choice under section 820-599, this section has effect for the purposes of working out the*safe harbour capital amount of the single company for a period (the test period ) that is all or part of the grouping period, if:

(a) throughout the test period, the single company is both a*wholly-owned subsidiary of a*foreign bank and an*ADI; and

(b) the single company has:

(i) issued*debentures covered by section 128F (which exempts interest on the debentures from withholding tax) of theIncome Tax Assessment Act 1936; and

(ii) made proceeds of the debentures available to an*Australian permanent establishment of the foreign bank, as loans to the Australian permanent establishment, for use in its Australian business;

unless that or another choice by the single company under section 820-A515 covers the Australian permanent establishment in relation to some or all of that period.

(2) The single company's*risk-weighted assets at a particular time during the test period are reduced by the total amounts of proceeds of the debentures that are at that time so made available by the single company.

(3) This section applies only to the 2002-2003 income year and to each of the next 3 income years.