The ATO on Wed 12.11.2014, released Draft Taxation Determination TD 2014/D18 which states that the fact that a non-resident entity has decided to invest indirectly in an Australian resident company through one or more interposed entities and the final leg in the chain is a debt interest will not of itself be sufficient to form a conclusion under para 974-80(1)(d) of the ITAA 1997 that there is a scheme, or a series of schemes, designed to operate so that the returns on the debt interest are used to fund returns on an equity interest held by another person (the “ultimate recipient”).
DATE OF EFFECT: When the final Determination is issued, it is proposed to apply both before and after its date of issue.
COMMENTS are due by 12 December 2014. ATO contact: Gorana Kolundzic – Tel: (02) 6216 2314; Fax: (02) 6216 1247; Email: Gorana.Kolundzic@ato.gov.au.
[LTN 219, 12/11/14]
Section 974-80 of the ITAA 1997
Equity interest arising from arrangement funding return through connected entities
(1) This section deals with the situation in which:
(a) an interest carries a right to a variable or fixed return from a company; and
(b) the interest is held by a * connected entity of the company; and
(c) apart from this section, the interest would not be an * equity interest in the company; and
(ca) the * scheme that gives rise to the interest is a * financing arrangement for the company; and
(d) there is a scheme, or a series of schemes, designed to operate so that the return to the connected entity is to be used to fund (directly or indirectly) a return to another person (the ultimate recipient ).
(2) The interest is an equity interest in the company if:
(a) the amount of the return to the ultimate recipient is in substance or effect * contingent on the economic performance (whether past, current or future) of:
(i) the company; or
(ii) a part of the company‘s activities; or
(iii) a * connected entity of the company or a part of the activities of a connected entity of the company; or
(b) either the right itself, or the amount of the return to the ultimate recipient, is at the discretion of:
(i) the company; or
(ii) a connected entity of the company; or
(c) the interest in respect of which the return to the ultimate recipient is made or another interest that arises from the scheme, or any of the schemes, referred to in paragraph (1)(d):
(i) gives the ultimate recipient (or a connected entity of the ultimate recipient) a right to be issued with an * equity interest in the company or a connected entity of the company; or
(ii) is an * interest that will, or may, convert into an equity interest in the company or a connected entity of the company;
and if the interest does not form part of a larger interest that is characterised as a * debt interest in the entity in which it is held, or a * connected entity, under Subdivision 974-B. The return may be a return of an amount invested in the interest.
Note 1: Section 974-90 allows regulations to be made clarifying when a right or return is taken to be at the discretion of a company or connected entity.
Note 2: Paragraphs (a), (b) and (c) parallel items 2, 3 and 4 of the table in subsection 974-75(1).