Taxation Laws Amendment Act (No. 5) 2003 (142 of 2003)

Schedule 1   Thin Capitalisation: amendments taking effect on 1 July 2001

Part 3   Choice by some financial entities to be treated as ADIs for thin capitalisation purposes

Income Tax Assessment Act 1997

6   After Subdivision 820-E

Insert:

Subdivision 820-EA - Some financial entities may choose to be treated as ADIs

Table of sections

820-430 When choice can be made, and what effect it has

820-435 Conditions

820-440 Revocation of choice

820-445 How this Subdivision interacts with Subdivisions 820-F, 820-FA and 820-FB

820-430 When choice can be made, and what effect it has

(1) An entity may choose to be treated, for the purposes of this Division (except this Subdivision), as set out in the table. However, the entity can make the choice only if subsection (5) is satisfied.

(2) The choice:

(a) has effect accordingly, except as provided in subsection (4); and

(b) ceases to have effect only as provided in this Subdivision; and

(c) covers each period:

(i) that started on or after a day specified in the choice (or on the day the choice is made if no day is specified); and

(ii) that is all or part of an income year.

(3) Subdivision 820-E applies to the entity, in relation to a period for which this section treats it as an *inward investing entity (ADI), as if all the entity's *business were banking business of the entity.

(4) The choice does not have effect for the purposes of determining whether the entity is covered by paragraph 820-910(2)(a) (about working out the associate entity debt of another entity).

Conditions for making the choice

(5) For the income year that is or includes the first period for which the entity would be treated in accordance with the choice, the entity must satisfy:

(a) subsection 820-435(1); or

(b) subsections 820-435(2) and (3).

Also, the entity must not have made a previous choice under this section that has ceased to have effect.

Conditions are retested every 3 years

(6) The choice ceases to have effect, or is taken to have ceased to have effect, as appropriate, at the end of an income year covered by subsection (7) of this section, unless the entity:

(a) satisfies subsection 820-435(1) for that income year; or

(b) satisfies subsections 820-435(2) and (3) for that income year.

(7) This subsection covers every third income year after the one referred to in subsection (5).

820-435 Conditions

(1) An entity satisfies this subsection for an income year if the average value, for that income year, of the entity's *on-lent amount is at least 80% of the average value, for that income year, of all the entity's assets.

(2) An entity satisfies this subsection for an income year if the first period that is all or part of that income year, and for which the entity would be treated in accordance with a choice under section 820-430, consists of one or more periods, each of which is either or both of these:

(a) a period throughout which the entity is a *financial entity because of paragraph (d) of the definition of financial entity in subsection 995-1(1) (which covers licensed (or exempt) dealers in derivatives);

(b) a period throughout which:

(i) the entity is the *head company of a *consolidated group or *MEC group; and

(ii) at least one *member of the group is a financial entity because of that paragraph.

(3) An entity satisfies this subsection for an income year if it satisfies subsection (2) and the amount worked out using this formula is greater than or equal to 0.8:

where:

on-lent amount means the average value, for that income year, of the entity's *on-lent amount.

total assets means the average value, for that income year, of all the entity's assets.

UG on derivatives means the average value, for that income year, of the entity's assets consisting of unrealised gains on trading derivatives within the meaning of the Corporations Act 2001.

UL on derivatives means the lesser of:

(a) the average value, for that income year, of the entity's liabilities consisting of unrealised losses on trading derivatives within the meaning of the Corporations Act 2001; and

(b) the average value, for that income year, of the entity's assets consisting of unrealised gains on trading derivatives within the meaning of that Act.

On-lent amount increased for financial entity whose assets include precious metals

(4) In working out whether an entity satisfies subsection (1) or (3) for an income year, the average value, for that income year, of the entity's *on-lent amount is increased by the average value, for that income year, of the entity's assets that consist of *precious metals, but only if the entity satisfies subsection (5) for that income year.

(5) An entity satisfies this subsection for an income year if the first period that is all or part of that income year, and for which the entity would be treated in accordance with a choice under section 820-430, consists of one or more periods, each of which is either or both of these:

(a) a period throughout which the entity is a *financial entity;

(b) a period throughout which:

(i) the entity is the *head company of a *consolidated group or *MEC group; and

(ii) at least one *member of the group is a financial entity.

820-440 Revocation of choice

(1) A choice under section 820-430 can be revoked only with the written approval of the Commissioner. The Commissioner may approve a revocation only if satisfied that the entity's circumstances have changed significantly since the choice was made.

(2) If revoked, the choice does not have effect for a period that starts on or after the day on which the Commissioner's approval is given, unless the revocation is expressed to take effect on an earlier day. In that case, it does not have effect for a period that starts on or after the earlier day.

820-445 How this Subdivision interacts with Subdivisions 820-F, 820-FA and 820-FB

Subdivision 820-F

(1) A choice under section 820-430 does not affect how section 820-550 (Classification of the resident TC group) applies to a *resident TC group for an income year unless the group could have made a choice under section 820-430 covering the whole of that income year if:

(a) the group had been a company throughout the income year; and

(b) each entity in the group had been a division or part of that company, rather than a separate entity, at all times during the income year when the entity was in the group.

Note: To work out the times during the income year when an entity was in the group, see section 820-530.

(2) A choice under section 820-430 does not have effect for so much of a period as happens while the entity is in a *resident TC group for an income year if, apart from the choice, section 820-575 would apply Subdivision 820-E to the group for that income year as if the group were an *inward investing entity (ADI).

Subdivision 820-FA

(3) A choice under section 820-430 does not have effect for so much of a period as happens while the entity is a *subsidiary member of a *consolidated group or *MEC group.

Note: If the head company of the group makes a choice under that section, that choice will have effect instead.

Subdivision 820-FB

(4) A choice under section 820-430 does not have effect for so much of a period as happens during the grouping period for a choice by the entity under section 820-597 or 820-599 (about treating foreign bank branches as part of the entity).

Note: Instead, the choice under section 820-597 or 820-599 will result in the entity being an outward investing entity (ADI) or an inward investing entity (ADI) for the grouping period: see section 820-609.