Bills Digest No. 16 2001-02
New Business Tax System (Thin Capitalisation) Bill 2001
WARNING:
This Digest was prepared for debate. It reflects the legislation as
introduced and does not canvass subsequent amendments. This Digest
does not have any official legal status. Other sources should be
consulted to determine the subsequent official status of the
Bill.
CONTENTS
Passage History
Purpose
Background
Main Provisions
Endnotes
Appendix 1
Contact Officer & Copyright Details
New Business Tax System (Thin
Capitalisation) Bill 2001
Date Introduced: 28 July 2001
House: House of Representatives
Portfolio: Treasury
Commencement: 1 July 2001. Transitional
provisions provide for the existing rules to remain in force for
the remainder of a financial year for an entity where their year
continues past 1 July 2001.
To introduce new thin capitalisation rules which
provide the circumstances under which a deduction for interest
payments which would otherwise be allowable will be reduced as an
entity does not have sufficient equity compared to its debt levels.
The rules apply to entities which operate both in Australia and
overseas and are designed to prevent excessive claims relating to
the Australian business of a multi-national operator.
The new rules will be extended to
Australian-controlled multi-national entities.
Thin capitalisation currently refers to the
rules which apply to limit the interest deductions available to an
Australian entity which is foreign controlled and which has an
overseas debt to equity ratio in excess of that allowed. A major
function of the thin capitalisation rules is to prevent
multi-national corporations from organising their debt to equity
ratios for the purpose of claiming the maximum interest deduction
in Australia, where interest on borrowings is generally fully
deductible. The thin capitalisation rules are contained in
Divisions 16 Fand 16G of the Income Tax Assessment Act
1936 (ITAA).
The method for calculating whether a deduction
will be allowed is complex. Additional details are contained in
Appendix 1, however the following desciption provides a brief
summary.
There are three concepts involved in the
calculation: foreign control, foreign debt and foreign equity.
- foreign control - the principal test is where a non-resident is
in a position to receive at least 15% of dividends, profits or
capital of the entity
- level of foreign debt - this is based on whether interest is
payable on any amounts borrowed from the foreign controller and
their associates, so that if interest is not payable the amount is
not included in the calculation of the amount of debt. There are
some variations according to whether the entity is a financial
institution.
- level of foreign equity - this is based on the amount of share
capital the foreign controller and their associates are entitled to
plus their entitlement to accumulated profits or asset revaluation,
minus any amount owing to the foreign controller and their
associates. Again, there are some variations for financial
institutions.
Once the amount of relevant foreign debt and
equity has been determined (the above is a simplification of the
rules that may apply), the ITAA provides that a deduction for the
resident entity will be disallowed where the interest paid to the
foreign controller and associates exceed the allowable debt to
equity ratio, which is 2:1 for general entities and 6:1 for
financial institutions.
Whether the ratio has been exceeded and the
extent of any excess is, prima facie, to be determined on the
highest level of which debt exceeds equity during the year.
However, the ITAA also allows entities the option of averaging the
excess over the number of days during the year in which there was
an excess which should result in a lower figure than the maximum
excess during the year.
Ralph Report
The thin capitalisation rules were examined as
part of the Review of Business Taxation, which reported in
July 1999 (the Ralph Report). The Ralph Report noted that a major
function of the thin capitalisation rules was to prevent
multi-national corporations from organising their financial affairs
to be able to claim the maximum interest deduction in Australia,
where interest on borrowings is generally fully deductible, by
distributing debt and equity within the organisation. It was also
noted that a balance needed to made between the need to protect
revenue and not to disadvantage genuine commercial arrangements and
that:
Australia's current thin capitalisation
provisions are not fully effective at preventing an excessive
allocation of debt to the Australian operations of multinationals
because they refer only to foreign related party debt and foreign
debt covered by a formal guarantee rather than total debt. Hence
they do not restrict the proportion of third party debt that can be
allocated to the Australian operations.(1)
To overcome this problem it was recommended that
the rules be extended to deal with the total of an organisation,
including where the entity is a branch or subsidiary of a foreign
controller. It was also recommended that the rules be extended to
Australian multi-national investors with non-portfolio investments
on the basis that they were also in a position to maximise interest
deductions. These recommendations were proposed to operate in
conjunction with others relaxing the current rules, principally the
debt: equity ratio.
The inclusion of total debt was seen as a means
of addressing the situation described above where there is excess
non-related foreign debt allocated to an Australian operation,
while the extension of the thin capitalisation rules to branches as
well as subsidiaries makes the treatment of these two methods of
operating in Australia for a foreign entity more taxation neutral.
(The rules currently apply only to Australian resident entities and
branches of a foreign entity operating in Australia are not
included in this category. The application of the rules to both
subsidiaries and branches will make the choice of which vehicle to
use less dependant on differing taxation
treatment.)(2)
The extension of the rules to Australian
multinationals was seen as a method of preventing 'excessive' debt
being allocated to the Australian operations and so preventing
'unwarranted' interest deductions. The Ralph Report notes that this
proposal faced broad opposition during
consultations.(3)
In relation to the amount of debt on which
interest deductions may be claimed, the Ralph Report recommended a
two tier test.
First, deductions would be allowed where the
debt: equity ratio did not exceed a 'safe harbour' limit, which was
proposed to be 3:1. The increase from the current ratio of 2:1 was
justified on the grounds that total debt would now be included. The
amount of equity was proposed to be total shareholders funds,
reflecting the use of total debt.
If the 3:1 ratio was exceeded, it was proposed
that deductions be allowed if it could be shown that the gearing
level could have been maintained by an independent party operating
under the same terms and conditions having regard to a number of
factors, including the world-wide gearing level of the group, the
ability of the Australian operation to service the debt and global
industry practices. This was termed the 'arm's length
test'.(4) For financial institutions it was recommended
that the ratio be the same as that imposed by the relevant
regulatory body for capital reserves. If there was no relevant
regulatory ratio, it was recommended that the general safe harbour
ratio of 3:1 apply, with debt that has been 'on-lent' being
excluded from the calculation, subject to a maximum ratio of
20:1.(5)
It was also recommended that the level of
control to determine if there is a foreign controller be increased
from the existing 15% to 50%. This was seen as consistent with the
general rules applying to controlled foreign companies contained in
Part X of the ITAA. It was considered that:
Most foreign-owned investments are subject to 50
per cent or higher control, so moving to a 50 per cent control test
will have minimal effect on the number of entities subject to thin
capitalisation rules.(6)
The Ralph Report also examined new definitions
for debt and equity designed to reflect the function of a
contribution to an entity rather than its legal form. The new
definitions are dealt with in the New Business Tax System (Debt and
Equity) Bill 2001 and, while their impact on the proposed new thin
capitalisation rules is relatively minor compared to the new rules
contained in this Bill, their existence should be remembered when
considering the impact of this Bill.
Government Response
The government's initial response to the Ralph
report was to accept the recommendation regarding thin
capitalisation, including its inclusion of total debt, application
to Australian multinationals and the 'safe harbour' and 'arm's
length' tests. It was proposed that the measures commence from 1
July 2001.(7) An Exposure Draft of the Bill was released
on 21 February 2001 and following consultation and submissions on
the Exposure Draft a number of further changes were announced on 22
May 2001. They included:
- The new rules will apply to an entity's financial year
commencing after 30 June 2001, so that entities which do not have a
financial year commencing on 1 July will not have to adopt the new
rules during a financial year
- Where the proposed new debt and equity rules alter the status
of an instrument entities will be able to elect that they retain
their current status until 30 June 2004
- Taxpayers who claim interest deductions of less than $250 000
will be exempt from the thin capitalisation rules
- The safe harbour capital requirements for financial
institutions will be reduced from 7% to 4%
- Certain large, low risk assets, such as leases, will be
excluded from the definition of debt for financial institutions,
and
- The definition of 'associates' for outward investors (ie
Australian multinationals) will be altered to require that a family
member by able to sufficiently influence the investor being
included as an associate.
These and other changes are estimated to cost
$70 million in 2001-2, $45 million in 2002-3, $60 million in 2003-4
and $70 million in 2004-5. The original revenue gains from the thin
capitalisation changes were estimated by the Treasurer at $1340
million until the end of 2004-5 (Press Release No. 74 of 1999,
Attachment O) and with these changes the new estimate is 'around
$1.1 billion' (Budget Paper No. 2, 2001-2), reflecting the $245
million cost of the changes announced by the
Treasurer.(8)
Schedule 1 of the Bill will
replace current Chapter 4 of the Income Tax Assessment Act
1997 (ITAA97) by inserting a new Chapter 4 dealing with the
new thin capitalisation rules. The current Chapter 4 has largely
been repealed and dealt with the collection of various taxes which
were deleted with the introduction of the Pay As You Go tax
collection mechanism.
The threshold under which the proposed rules
will not apply is contained in proposed section
820-35. It will apply where an entity and its associates
have debt deductions of $250 000 or less. Debt deduction is
given a wide meaning by proposed section 820-40
and includes interest, the difference in value between a financial
benefit received and provided, costs incurred in obtaining or
maintaining a financial benefit and other expenses covered by the
regulations. Specifically excluded items from the calculation of
debt deduction include loses arising from hedging, salary and wages
and rental expenses.
Outward Investors
The thin capitalisation rules for outward
investors that are not authorised deposit-taking institutions (ADI)
(An ADI is an entity which the Australian Prudential Regulation
Authority has granted authorisation to conduct banking operations
under the Banking Act 1959, eg banks are ADIs.) are
contained in proposed subdivision 820-B.
An entity will be an outward investing entity
(non-ADI) if it is an Australian controller of an Australian
controlled foreign entity or has at least one overseas permanent
establishment. The classification will also apply where an
associate falls within this category and there will be two
sub-categories, general and financial, with the latter applying
where the entity is a financial entity, but not an ADI. If an
entity is an outward investor, the next step is to determine if its
adjusted average debt exceeds its maximum allowable debt.
- Adjusted average debt: In calculating this, any amount
attributable to an overseas permanent establishment is to be
disregarded (as these will be subject to tax in the country of the
establishment).(9) The first step is to calculate the
average value of the debt that gives rise to a debt deduction.
(From the average value of debt there is to be deducted relevant
debt of associates and controlled foreign entities. It should be
noted that this calculation deals with total debt and not just debt
to a foreign controller therefore implementing the Ralph Report
recommendations in this regard.
- Maximum allowable debt: This will be the greater of the safe
harbour amount, arm's length amount or, if the outward investing
entity is not also an inward investment entity, the worldwide
gearing amount (Under the control rules it is possible for an
entity to be classified as both an outward and inward investment
entity. The recognition of the worldwide gearing amount for
Australian entities allows them to gear Australian entities to the
same extent as their overseas operations without interest
deductions being disallowed.)
- Safe harbour amount: For a general outward investor this is
determined according to proposed section 820-95,
which provides for the value of the assets of the entity to be
determined, and this amount to be reduced by associate entity debt
and equity and controlled foreign entity debt and equity. This
amount is further reduced by any non-debt liabilities of the entity
and then multiplied by 0.75. Finally, any associate entity excess
amount (calculated according to proposed section
820-920) is added. According to the Explanatory Memorandum
this results in a debt: equity ratio of 3:1.(10)
- For a financial outward investor, the safe harbour amount is
the lesser of the total debt amount and the adjusted on-lent
amount. The total debt amount is calculated on a similar basis to
that for general outward investors, although the multiple used is
20/21 and, according to the Explanatory Memorandum, gives a debt:
equity ratio of 20:1.(11) The adjusted on-lent amount
allows a debt: equity ration of 3:1 after on-lent debt, certain
leases and amounts agreed to be repurchased have been
excluded.
- Arm's length amount: Basically this will be the amount of debt
that the entity could reasonably be expected to have and which
would have been provided by commercial lending institutions having
regard to a number of factors, including the entity's commercial
activities in Australia and the nature of the entity's assets and
liabilities. This amount is a notional figure, does not depend on
any actual offers of credit made and is to be estimated by the
entity, although the Commissioner will have power to substitute a
different amount (proposed section 820-105).
- Worldwide gearing debt amount: The formulas for calculating
this amount for both general and financial outward investors are
based on 120% of the average value of the worldwide debt of the
entity divided by its average worldwide equity. This amount is
subject to generally minor adjustments to reflect matters such as
certain leasing and repurchasing arrangements (proposed
section 820-110).
Where the entities adjusted average debt for the
year exceeds their allowable debt for the year, the deduction for
debt will be disallowed in accordance with the ratio by which the
debt exceeds the allowable debt (proposed section
820-115). The same formulas will be used to determine if
there is excess debt for a period of less than a year
(proposed section 820-120).
Outward investing ADIs
The rules for these entities are contained in
proposed subdivision 820-D. The thin
capitalisation rules currently do not apply to an outward investing
ADI unless it is foreign controlled. An entity will be an outward
investing ADI if it is an ADI and:
- it controls one or more controlled foreign entities (whether an
entity is controlled by a foreign interest is to be determined in
accordance with the rules applying in relation to controlled
foreign corporations - generally 50% control),
- it has a permanent establishment overseas, or
- it is an associate of an outward investing entity or an outward
investing entity is an associate of it (it is possible for an
entity to be an associate of another for tax purposes without the
other entity being an associate of the first entity).
The minimum capital amount for outward investing
ADIs will be the lesser of their safe harbour capital amount, arm's
length capital amount and their worldwide capital amount. These are
defined as:
- Safe harbour amount: This is to be determined according to the
formula contained in proposed section 820-310 and
is the value of the risk weighted assets of the entity (basically
the prudential regulator's determination of these assets less such
assets attributable to overseas permanent establishments, certain
controlled foreign equity assets and assets disregarded by the
prudential regulator), multiplied by 4% plus the average of tier 1
prudential capital deductions of the entity, which is to be
determined according to the prudential standards applicable to the
entity.
- Arm's length capital amount: The minimum capital amount that
the entity could be expected to have in carrying out its Australian
business if the entity was a separate business acting at arm's
length from other parts of the entity. As with the other classes of
outwards investors this amount is a notional sum based on a number
of assumptions, including that the Australian business did not
carry on business through its overseas permanent establishments and
had no controlled foreign entity equity and its assets and
liabilities are as they were during the year (simply, this will be
the amount of capital needed to support its Australian operations)
(proposed section 820-315).
- Worldwide capital amount: This will be calculated by
determining the relevant risk weighted assets of the entity,
excluding those relating to overseas permanent establishments and
controlled foreign entity equity, multiplied by 8/10ths of the
group's worldwide capital ratio. To this is added the average of
the relevant tier 1 prudential capital deductions of the entity
(proposed section 820-320).
Where the average equity capital of the entity
is less than its minimum requirement, a proportion of its debt
deductions will be disallowed. The proportion will be determined by
dividing the capital shortfall by the average debt for the year
(proposed section 820-325).
Inward investing entities
(non-ADI)
Proposed section 820-185
provides that part of a debt deduction will be disallowed where the
inward investing entity is not also an outward investing entity (if
it is proposed section 820-85 will apply) and its adjusted average
debt exceeds its maximum allowable debt.
The rules will apply to foreign controlled
Australian entities (investment vehicles) and foreign entities and,
as with outward investment entities, there will be general and
financial categories (the rules to determine if an Australian
entity is foreign controlled will be discussed below).
- Adjusted average debt: The average value of the debt capital
that gives rise to a deduction less, if the entity is a foreign
controlled Australian entity, the value of associated entity debt
or, if the entity is a foreign entity, associated entity debt
attributable to the Australian operations.
- The maximum allowable debt will be the greater of the safe
harbour debt amount and the arm's length debt amount.
- Safe harbour debt amount: There are four categories of safe
harbour debt amount depending on whether the entity is a foreign
controlled Australian entity (inward investment vehicle) or a
foreign entity and then whether they are a general or financial
entity.
- For a general inward investment vehicle, the safe harbour
amount is to be determined according to proposed section
820-195, which provides that the amount is to be
determined according to the average value of the assets of the
entity, reduced by the debts of associated entities and equity and
non-debt equity. This amount is to be multiplied by 3/4. This is a
similar formula as used for outward general investors and should
result in the same 3:1 debt: equity ratio (ie deductions will not
be reduced if an entity's debt to equity ratio does not exceed the
same ratio allowed for outward investment entities).
- Inward investment vehicle (financial): As with outward
investors (financial) their safe harbour investment amount will be
the lesser of their 'total debt amount' or their adjusted 'on-lent
amount'. Similarly, the formula used to calculate the amount of
debt relates to that used for the general vehicles, but the
allowable ratio is 20:1 rather than 3:1. The similarities continue
in the calculation of the on-lent amount where amounts borrowed and
subsequently on-lent are excluded and a 3: debt equity ratio
applies. Again this places the outward and inward investors in a
similar position (proposed section 820-200).
- Inward investor (general): This will be determined in a similar
manner for outward investors but with only assets attributable to
the Australian branch to be taken into consideration. Again the
debt to equity ratio will be 3/4 of these assets, resulting in a
3:1 debt: equity ratio (proposed section
820-205).
- Inward investor (financial): A repeat of the situation for
general inward investors but with the multiple being 20/21
resulting in a 20:1 allowable debt: equity ratio and only
Australian assets being considered. Such entities will also have
the option of choosing the on-lent version of the test where only
Australian assets are considered, on-lent amounts are disregarded
and the debt: equity ratio is 3:1 (proposed section
820-210).
- Arm's length debt amount: This is a combination of the amount
of debt that an entity could reasonably be expected to have (and is
attributed to its Australian operations) and the amount that
non-associated commercial financial institutions could be expected
to have lent the entity. As with other calculations of arm's length
amounts, this is a notional amount to be determined according to a
number of assumptions, including that the entity vehicle did not
have associated entity debt or, if it is a foreign entity, the debt
only relates to the Australian operations and that any guarantee or
security given by associates or overseas permanent establishments
is disregarded. Account is also to be had of the nature of the
assets of the Australian entity, the entity's capacity to meet its
liabilities and any profits of the entity (proposed section
820-215).
If the adjusted average debt exceeds the maximum
allowable debt, a proportion of debt deductions will be disallowed.
The proportion will be the same as that calculated by dividing the
excess debt by the average debt (proposed section
820-220).
Inward investors (ADI)
An ADI inward investor will be a foreign bank
that carries out its operations in Australia through one or more
permanent establishments and will have its debt deductions reduced
where its average equity capital is less than a minimum capital
amount.
- Average equity capital: This will be the average value during
the year of equity capital attributable to the Australian permanent
establishments that are not related to 'OB activities' (this term
is defined in section 121D of the ITAA and generally relates to
activities involving an overseas person) and loans to the
Australian permanent establishments which do not give rise to a
deduction (proposed section 820-395).
- Minimum capital amount: This will be the lesser of the safe
harbour capital amount and the arm's length capital amount. The
safe harbour amount will be 4% of the risk-weighted assets of the
entity that relate to the Australian permanent establishment,
excluding those relating to OB activities. The arm's length capital
amount will be the minimum amount of equity capital that the entity
could reasonably be expected to have to carry on its Australian
operations if it was a separate entity and dealt with other parts
of the group on an arm's length basis. As with other arm's length
amounts, this is a notional sum determined having regard to a
number of assumptions and factors, including that the entity only
conducted banking activity in Australia and that the entity's
assets and liabilities were the same as they actually were during
the year (proposed section 820-410).
The proportion of the debt to be disallowed will
be determined according to the capital shortfall divided by the
average debt for the year (proposed section
820-415).
Groups
The Bill allows members of a group to choose to
be treated as a group for the calculation of whether part of the
debt deductions should be denied, and, the proportional reduction
in the deduction will apply to all members of the group.
Proposed subdivision 820-F
deals with the rules for resident groups. In applying the rules,
the various amounts are to be calculated as if the group prepared
consolidated accounts (whether such accounts are prepared or not)
(proposed section 820-470). For a 'maximum TC
group' (ie one where one company which is not a 100% subsidiary of
another company and its 100% owned subsidiaries), one of the
companies is an Australian entity, not a dual national and is a
100% subsidiary may choose:
- that all companies which are Australian entities and not dual
residents which end their financial year on the same day, together
with all partnerships and trusts in which the group holds all
interests and permanent establishments of foreign banks which
choose to be in the group, be treated as one group
(proposed section 820-505).
- that the entities be treated as more than one group with the
members of the subgroups being subsidiaries of the same company in
the maximum TC group (proposed section 820-510),
or
- that there be no groups (proposed section
820-520).
As with individual entities, groups will be
classified as outward investors (non-ADI), general or financial,
outward investors (ADI), inward investors (non-ADI), general or
financial or inward investors (ADI). The classification will be
made under the following rules:
- Outward investor (general): At least one entity in the group is
an outward investor (general) and none is a financial entity or an
ADI.
- Outward investor (financial): At least one member is an outward
investor (financial) and no entity is an ADI, or the group has at
least one outward investor (general) and a financial entity, that
is not an ADI, at the end of the year (this reflects the similar
rules particularly the 3:1 safe harbour ratio once on-lent amounts
are excluded that apply to these two classes).
- Inward investment vehicle (general): At least one entity in the
group is an inward investment vehicle (general) and the group has
no outward investment vehicle (non-ADI), financial entity or ADI at
the end of the year.
- Inward investment vehicle (financial): At least one member of
the group falls within this category and, at the end of the year,
no group member is an outward investment vehicle, general or
financial, or an ADI.
- Outward investment entity (ADI): The group has at least one of
these entities at the end of the year, or at the end of the year,
at least one of the members of the group is an outward investing
entity (non-ADI) and one member is an ADI (proposed section
820-550).
- Inward investing entities (ADI) will generally not be able to
use the grouping rules unless they are also an outward investing
entity (ADI) (proposed section 820-555).
- The general rule is that once a group has been classified the
previously described rules for that classification will apply to
the group, although there will be modifications to some components
in the various formulas that apply (eg in determining adjusted
average equity capital) (proposed sections
820-560-575).
Control
Proposed subdivision 820-H,
which deals with the definition of control of entities for both
Australian and foreign controllers, and proposed
subdivision 820-I, which deals with who is an associate of
an entity, are substantially similar to the rules contained in Part
X of the ITAA for controlled foreign corporations (as was
recommended in the Ralph Report - see above). As the provisions do
not implement new policy they will not be examined in this Digest,
except to note that the control test will increase from the current
15% rate to 50% or 40% in certain circumstances. Control is
determined according to the interest of the relevant entity and its
associates.
Record Keeping
Proposed subdivision 820-L will
insert special record keeping rules in respect of:
- inward investors which operate through a permanent
establishment in Australia. The requirements are that the entity
maintain sufficient records to establish the position of the
Australian permanent establishment, which is necessary for the
operation of the new rules,
- the arm's length values calculated by an entity. The records
are to relate to the various assumptions and factors to be
considered when determining the notional value allocated to an
arm's length transaction.
Application: To the income year commencing on or
after 1 July 2001. However, the record keeping requirements are to
apply from the year commencing on or after 1 July 2002. There are
also transitional provisions which allow the current rules
contained in the ITAA to continue to apply for the remainder of a
financial year for an entity which had a financial year commencing
before 1 July 2001 (this will prevent the entity from being
required to apply different rules for parts of a financial year).
These transition provisions are contained in proposed
Division 820 which will be inserted into the Income
Tax (Transitional Provisions) Act 1997 by item
22 of Schedule 1 of the Bill. As a
consequential amendment, item 4 of
Schedule 1 will repeal the current rules contained
in Divisions 16F and 16G of the ITAA
- Review of Business Taxation, Report, July 1999, p.659.
- ibid.
- ibid., p. 665.
- ibid., pp. 660-1.
- ibid., p. 663.
- ibid., p. 666.
- Treasurer, Press Release No. 74 of 1999, 11 November
1999, Attachment G.
- Budget Measures 2001-02, Budget Paper No. 2, p. 34.
- There are three methods for calculating average amounts of the
value of the amount, in this case debt, at the first and last days
of the financial year added together and divided by 2; the three
day method where the first, last and middle days of the year are
added and divided by 3; and the frequent measurement method where
quarterly or more frequent measurements are taken, added together
and divided by the number of periods used - proposed
subdivision 820-G).
- Explanatory Memorandum, p. 33.
- ibid.
Control, Debt and Equity Current
Rules
A non-resident, or a prescribed dual resident,
will be taken to be in control of a resident entity where that
person, either alone or with their associates, satisfies one a
number of requirements. The principal test is whether the
non-resident is in a position of receive 15% of the dividends or
capital of a company, 15% of the capital or profits of a
partnership or 15% of the income or corpus of a trust estate, or is
capable under a scheme of gaining such an entitlement. The 15%
threshold is relatively common in other areas of the law, such as
determining the controlling interests for corporations, although in
other areas of taxation law, such as determining if a corporation
is a controlled foreign corporation, a higher level test is
used.
Where there is a foreign controller, the next
step is to determine the level of foreign debt and equity. The
level of foreign debt is based on whether interest is payable on
any amounts borrowed from the foreign controller and their
associates, so that if interest is not payable the amount is not
included in the calculation of the amount of debt. Where the
resident company is not a financial institution, amounts borrowed
from a non-resident who is not the foreign controller or their
associate may be included if it is borrowed subject to a guarantee
by the foreign controller or their associate. However, this amount
will not be included if the Commissioner is satisfied that the
amount could have been borrowed without the guarantee. Amounts
raised by the issue of debentures through a public offer are
excluded from the calculation of debt to the foreign controller.
For financial institutions, amounts held by a foreign bank in
accounts maintained solely for the short term settlement of
international transactions are also to be excluded in calculating
the amount of debt.
The calculation of foreign equity for a resident
company is based on the amount of share capital the foreign
controller and their associates are entitled to plus any amount
from accumulated profits or asset revaluation which the foreign
controller and their associates would be entitled to. This amount
is then reduced by amounts owed to the resident company by the
foreign controller or their associates, although public issue
debentures and short term trade credits are excluded from
calculating the amounts owed. For financial institutions, amounts
held for the short term settlement of international transactions
are also excluded. For partnerships and trusts, the value of the
foreign controller's equity is determined according to their
interest in the partnership (where the interest is determined
according to the end of year balance sheet of the partnership) or
trust (where the interest is based on their fixed interest in the
trust). In both cases the interest is reduced by any amount owed to
the partnership or trust. There are also specific anti-avoidance
provisions contained in the ITAA to reduce the chances of foreign
controlled entities reducing debt or increasing equity through
various schemes.
Chris Field
7 August 2001
Bills Digest Service
Information and Research Services
This paper has been prepared for general distribution to
Senators and Members of the Australian Parliament. While great care
is taken to ensure that the paper is accurate and balanced, the
paper is written using information publicly available at the time
of production. The views expressed are those of the author and
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ISSN 1328-8091
© Commonwealth of Australia 2000
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2001.
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