On Wed 18.3.2015, the ATO released Taxation Determination TD 2015/3, which ruled that

‘The interest’ referred to in the phrase at the end of subsection 974-80(2) is the interest held by the ‘ultimate recipient’ and not the interest held by the ‘connected entity’.

The Determination goes on the explain:

Division 974 contains rules for classifying an interest as debt or equity for certain tax purposes. Section 974-80 is an integrity provision within Division 974. It deals with financing arrangements that grant an investor (the ultimate recipient) an interest which is effectively (in substance but not in form), an equity interest in a company. The provision applies when the equity-like returns that are paid to the ultimate recipient are funded from otherwise tax deductible payments made by the company or connected entities of the company. That is, where interposed debt interests are used to create ‘de facto’ equity interests, the provision reclassifies the interposed debt interests as equity interests. This causes the returns paid in respect of those same interests to be non-deductible.

The Determination was previously issued as Draft Taxation Determination TD 2014/D19 and is the same.

DATE OF EFFECT: Applies both before and after its date of issue.

See also: [LTN 52, 18/3/15] [IT 18/3/15]