Commonwealth: New Business Tax System (Debt and Equity) Act 2001 (Cth)

New Business Tax System (Debt and Equity) Act 2001 No. 163, 2001 New Business Tax System (Debt and Equity) Act 2001 No. 163, 2001 An Act to implement the New Business Tax System in relation to debt and equity interests, and for related purposes Contents 1 Short title................................... 2 Commencement............................... 3 Schedule(s).................................. Schedule 1—Debt and equity interests Part 1—Amendment of the Income Tax Assessment Act 1997 Income Tax Assessment Act 1997 Part 2—Amendment of the Income Tax Assessment Act 1936 Income Tax Assessment Act 1936 Part 3—Amendment of the Taxation Administration Act 1953 Taxation Administration Act 1953 Part 4—Application of amendments Schedule 2—Dictionary amendments Income Tax Assessment Act 1997 New Business Tax System (Debt and Equity) Act 2001 No. 163, 2001 An Act to implement the New Business Tax System in relation to debt and equity interests, and for related purposes [Assented to 1 October 2001] The Parliament of Australia enacts: 1 Short title This Act may be cited as the New Business Tax System (Debt and Equity) Act 2001. 2 Commencement This Act commences, or is taken to have commenced, on 1 July 2001. 3 Schedule(s) Each Act that is specified in a Schedule to this Act is amended or repealed as set out in the applicable items in the Schedule concerned, and any other item in a Schedule to this Act has effect according to its terms. Schedule 1—Debt and equity interests Part 1—Amendment of the Income Tax Assessment Act 1997 Income Tax Assessment Act 1997 1 Section 12‑5 (after table item headed "death of timber owner") Insert: debt interests certain returns in respect of debt interests........... 25‑85 2 Section 12‑5 (table item headed "dividends") After: franking credits, pooled development funds (PDFs)................. 124ZM insert: non‑share equity interests, no deduction for return in respect of.......................................................................................... 26‑26 3 After section 25‑80 Insert: 25‑85 Certain returns in respect of debt interests (1) This section deals with a *return that an entity pays or provides on a *debt interest. (2) The *return is not prevented from being a *general deduction for an income year under section 8‑1 merely because: (a) the return is *contingent on the economic performance (whether past, current or future) of: (i) the entity or a part of the entity's activities; or (ii) a *connected entity of the entity or a part of the activities of a connected entity of the entity; or (b) the return secures a permanent or enduring benefit for the entity or a connected entity of the entity. (3) If the *return is a *dividend, the entity can deduct the return to the extent to which it would have been a *general deduction under section 8‑1 if: (a) the payment of the return were the incurring by the entity of a liability to pay the same amount as interest; and (b) that interest were incurred in respect of the finance raised by the entity and in respect of which the return was paid or provided; and (c) the *debt interest retained its character as a debt interest for the purposes of subsection (2). (4) Subsections (2) and (3) do not apply to a *return to the extent to which it would be a *general deduction under section 8‑1 apart from this section. (5) Subject to regulations made for the purposes of subsection (6), subsections (2) and (3) do not apply to the return to the extent to which the annually compounded internal rate of return exceeds the *benchmark rate of return for the interest increased by 150 basis points. (6) The regulations may provide that subsection (5) applies in the circumstances specified in the regulations as if the reference to 150 basis points were a reference to a greater or lesser number of basis points. 4 After section 26‑25 Insert: 26‑26 Non‑share distributions and dividends (1) A company cannot deduct under this Act: (a) a *non‑share distribution; or (b) a return that has accrued on a *non‑share equity interest. (2) A company cannot deduct a *dividend paid on an *equity interest in the company as a *general deduction under this Act. 5 Paragraph 104‑25(1)(f) Omit "note", substitute "interest". 6 Subsection 104‑25(5) (note 1) Omit "note", substitute "interest". 7 Paragraph 104‑35(5)(c) Repeal the paragraph, substitute: (c) a company issues or allots *equity interests in the company; or 8 Paragraph 104‑35(5)(e) Repeal the paragraph, substitute: (e) a company grants an option to acquire equity interests or *debentures in the company; or 9 Paragraph 104‑155(5)(c) Repeal the paragraph, substitute: (c) a company issues or allots *equity interests in the company; or 10 Paragraph 104‑155(5)(e) Repeal the paragraph, substitute: (e) a company grants an option to acquire equity interests or *debentures in the company; or 11 Section 109‑10 (table item 2) Repeal the item, substitute: 2 A company issues or allots *equity interests in the company to you when contract is entered into or, if none, when equity interests issued or allotted 12 Section 109‑55 (table item 11) Omit "note" (wherever occurring), substitute "interest" 13 Section 112‑70 Repeal the section, substitute: 112‑70 Convertible interests Convertible interests Item In this situation: Element affected: See section: 1 You acquire shares, or units in a unit trust, by converting a convertible interest First element of cost base and reduced cost base 130‑60 14 Subsection 114‑15(4) Omit "note", substitute "interest". 15 Subsection 114‑15(6) (heading) Repeal the heading, substitute: Convertible interests 16 Subsection 114‑15(6) Omit "note" (wherever occurring), substitute "interest". 17 Subsection 114‑15(6) (note) Omit "note", substitute "convertible interest". 18 Paragraph 130‑40(3)(a) Omit "notes" (wherever occurring), substitute "interests". 19 Paragraph 130‑40(3)(b) Omit "notes" (wherever occurring), substitute "interests". 20 Subsection 130‑40(4) Omit "notes", substitute "interests". 21 Subsection 130‑40(6) (table) Repeal the table, substitute: Modifications on exercise of rights Item In this situation: The modification is... 1 You exercise rights issued to you to *acquire the *shares, units or options. The first element of your *cost base for the shares, units or options is the sum of: (a) the cost base of the rights at the time of exercise; and (b) all the amounts to be added under subsection (6A). The first element of their *reduced cost base is worked out similarly. 2 You exercise rights you *acquired from another entity to acquire the *shares, units or options. The first element of your *cost base for the shares, units or options is the sum of: (a) the cost base of the rights at the time of exercise; and (b) all the amounts to be added under subsection (6A). The first element of their *reduced cost base is worked out similarly. 3 You exercise rights issued to you to *acquire the *shares, units or options, and you acquired the original shares or *convertible interests, or the original units or convertible interests, before 20 September 1985. The first element of your *cost base for the shares, units or options is the sum of: (a) the market value of the rights when they were exercised; and (b) all the amounts to be added under subsection (6A). The first element of their *reduced cost base is worked out similarly. 22 Subsection 130‑40(6) Omit "The payment can include giving property: see section 103‑5." 23 After subsection 130‑40(6) Insert: (6A) An amount is to be added under this subsection if a *capital gain made from the right has been reduced under section 118‑20. This is so even though a capital gain that is made on exercise is disregarded under subsection (7). The amount to be added is the amount of the reduction. Note: For example, a capital gain made on the exercise of the right under section 118‑20 may be reduced because an amount is included in the owner's assessable income under subsection 26BB(2) of the Income Tax Assessment Act 1936 (about assessing a gain on disposal or redemption of a traditional security) or section 159GS of that Act (about balancing adjustments on transfer of a qualifying security). 24 Subsection 130‑45(1) Omit "notes" (wherever occurring), substitute "interests". 25 Subdivision 130‑C (heading) Repeal the heading, substitute: Subdivision 130‑C—Convertible interests 26 Subsection 130‑60(1) Omit "note" (first occurring), substitute "interest". Note: The heading to section 130‑60 is altered by omitting "note" and substituting "interest". 27 Subsection 130‑60(1) (table) Repeal the table, substitute: Conversion of a convertible interest Item In this situation: The modification is: 1 You *acquire *shares or units in a unit trust by converting a *convertible interest that is a *traditional security. The first element of the *cost base of the shares or units is the sum of: (a) the cost base of the convertible interest at the time of conversion; and (b) all the amounts to be added under subsection (1A). The first element of their *reduced cost base is worked out similarly. 2 You *acquire *shares (except shares acquired under an *employee share scheme) by converting a *convertible interest that is not a *traditional security. The first element of the *cost base of the shares is the sum of: (a) the cost base of the convertible interest at the time of conversion; and (b) all the amounts to be added under subsection (1A). The first element of their *reduced cost base is worked out similarly. 3 You *acquire units in a unit trust by converting a *convertible interest (except one that is a *traditional security) that was issued by the trustee of the unit trust after 28 January 1988. The first element of the *cost base of the units is the sum of: (a) the cost base of the convertible interest at the time of conversion; and (b) all the amounts to be added under subsection (1A). The first element of their *reduced cost base is worked out similarly. 28 Subsection 130‑60(1) Omit "The payment can include giving property: see section 103‑5." 29 After subsection 130‑60(1) Insert: (1A) An amount is to be added under this subsection if a *capital gain from the *convertible interest has been reduced under section 118‑20. This is so even though a capital gain that is made on conversion is disregarded under subsection (3). The amount to be added is the amount of the reduction. Note: For example, a capital gain made on the conversion under section 118‑20 may be reduced because an amount is included in the owner's assessable income under subsection 26BB(2) of the Income Tax Assessment Act 1936 (about assessing a gain on disposal or redemption of a traditional security) or section 159GS of that Act (about balancing adjustments on transfer of a qualifying security). 30 Subsection 130‑60(2) Omit "note", substitute "interest". 31 Subsection 130‑60(3) Omit "note", substitute "interest". 32 Subsection 130‑60(3) (note 1) Omit "note", substitute "interest". 33 Part 3‑5 (link note after the heading) Repeal the link note, substitute: [The next Division is Division 164.] Division 164—Non‑share capital accounts for companies Guide to Division 164 164‑1 What this Division is about A company that issues non‑share equity interests will have a notional account called a non‑share capital account. This account records contributions to the company in relation to those non‑share equity interests and returns made by the company of those contributions. A non‑share distribution that represents a return of contributions is not taxed as a dividend (subject to the anti‑avoidance provisions dealing with dividend substitution). In certain circumstances a company may use its share capital account as the source for such distributions. Table of sections Operative provisions 164‑5 Object 164‑10 Non‑share capital account 164‑15 Credits to non‑share capital account 164‑20 Debits to non‑share capital account [This is the end of the Guide.] Operative provisions 164‑5 Object (1) This Division provides for the *non‑share capital account through which a company records contributions made to it in respect of *non‑share equity interests and returns by it of those contributions. (2) This allows a *non‑share distribution to be characterised as either: (a) a *non‑share dividend; or (b) a *non‑share capital return. 164‑10 Non‑share capital account (1) A company has a non‑share capital account if: (a) the company issues a *non‑share equity interest in the company on or after 1 July 2001; or (b) the company has issued a non‑share equity interest in the company before 1 July 2001 that is still in existence on 1 July 2001. (2) The account continues in existence even if the company ceases to have any *non‑share equity interests on issue. (3) The balance of the account cannot fall below nil. (4) The only credits and debits that may be made to the account are those provided for in sections 164‑15 and 164‑20. 164‑15 Credits to non‑share capital account (1) If the company issues a *non‑share equity interest in the company on or after 1 July 2001, there is a credit to the *non‑share capital account equal to: where: amount received is the market value, when it is provided, of the consideration the company receives for the issue of the interest. share capital account credit is the amount of any credit made to the company's share capital account in respect of the issue of the interest. Note: The issue of a non‑share equity interest can give rise to a credit to the company's share capital account if the interest consists, for example, of a stapled security that includes a share in the company's capital. (2) If a *debt interest in the company changes at a particular time to an *equity interest in the company because of section 974‑110, there is a credit to the *non‑share capital account at that time equal to: where: amount received is the market value, when it was provided, of the consideration the company received for the issue of the interest. amount returned is so much of the amount received as has been returned to a holder of the interest before the change occurs. share capital account credit is the amount of any credit made to the company's share capital account in respect of the issue of the interest. (3) If the company has a *non‑share capital account at the beginning of 1 July 2001 because of a *non‑share equity interest the company issued before 1 July 2001, there is a credit to the non‑share capital account on that day for each non‑share equity interest in the company that: (a) was issued before 1 July 2001; and (b) is still in existence on 1 July 2001. (4) The amount of the credit under subsection (3) is: where: amount received is the market value, when it is provided, of the consideration the company receives for the issue of the interest. return of amount received is the sum of the amounts paid before 1 July 2001 by way of return, in whole or in part, of the amount received. share capital account credit is the sum of any amounts credited before 1 July 2001 to the company's share capital account in respect of the issue of the interest. 164‑20 Debits to non‑share capital account (1) The company may debit the whole or a part of a *non‑share distribution against the company's *non‑share capital account: (a) to the extent to which the distribution is made as consideration for the surrender, cancellation or redemption of a *non‑share equity interest in the company; or (b) to the extent to which: (i) the distribution is made in connection with a reduction in the market value of a non‑share equity interest in the company; and (ii) the amount of the distribution is equal to the amount of the reduction in market value. (2) The total of the amounts debited to the account in respect of a particular *non‑share equity interest must not exceed the total of the amounts credited to the account in respect of the interest. (3) If an *equity interest in the company changes at a particular time to a *debt interest in the company because of section 974‑110, there is a debit to the *non‑share capital account at that time equal to: where: credits in relation to the interest is the sum of all the credits that have been made to the *non‑share capital account in relation to the interest before the change occurs. debits in relation to the interest is the sum of all the debits that have been made to the *non‑share capital account in relation to the interest before the change occurs. 34 After Division 960 Insert: [The next Division is Division 974.] Division 974—Debt and equity interests Table of Subdivisions 974‑A General 974‑B Debt interests 974‑C Equity interests 974‑D Common provisions 974‑E Non‑share distributions by a company 974‑F Related concepts Subdivision 974‑A—General Guide to Division 974 974‑1 What this Division is about This Division tells you whether an interest is a debt interest, or an equity interest, for tax purposes. An interest that could be characterised as both a debt interest and an equity interest will be treated as a debt interest for tax purposes (except for certain interests that fund returns on equity interests). Whether an interest is a debt interest or an equity interest matters because returns on debt interests are not frankable but may be deductible while returns on equity interests are not deductible but may be frankable. This Division extends beyond shares the range of interests that are recognised as equity in a company. An interest that is an equity interest in a company but is not a share will be treated in the same way as a share for some tax purposes (particularly in relation to the determination of the tax treatment of returns on the interest). This Division also tells you how to work out which distributions made in respect of a non‑share equity interest in a company will be non‑share dividends and which will be non‑share capital returns. Those that are non‑share dividends will be treated, for most tax purposes, in the same way as dividends. Table of sections 974‑5 Overview of Division Operative provisions 974‑10 Object 974‑5 Overview of Division Test for distinguishing debt and equity interests (1) The test for distinguishing between debt interests and equity interests focuses on economic substance rather than mere legal form (see subsection 974‑10(2)). The test is designed to assess the economic substance of an interest in terms of its impact on the issuer's position. Debt interests (2) Subdivision 974‑B tells you when an interest is a debt interest in an entity. The basic test is in section 974‑20. Equity interests (3) Subdivision 974‑C tells you when an interest is an equity interest in a company. The basic test is in section 974‑75. Tie breaker between debt and equity (4) If an interest satisfies both the debt test and the equity test, it is treated as a debt interest and not an equity interest. Distributions in relation to equity interests that are not shares (5) If you have an equity interest in a company that is not a share, Subdivision 974‑E tells you what will count as a non‑share distribution, a non‑share dividend and a non‑share capital return in relation to the interest. Concepts used in the debt and equity tests (6) Subdivision 974‑F defines a number of concepts that are used in the debt and equity tests (financing arrangement, effectively non‑contingent obligation, benchmark rate of return and converting interest). [This is the end of the Guide.] Operative provisions 974‑10 Object (1) An object of this Division is to establish a test for determining for particular tax purposes whether a *scheme, or the combined operation of a number of schemes: (a) gives rise to a *debt interest; or (b) gives rise to an *equity interest. Note: The test is used, for example, for: (a) identifying distributions that may be frankable and which may be subject to dividend withholding tax; and (b) identifying returns that may be deductible to the company making the return; and (c) resolving uncertainty as to the proper tax treatment for debt/equity hybrid interests (interests that have some debt qualities and some equity qualities); and (d) identifying debt capital for the purposes of Division 820 (thin capitalisation rules). (2) Another object of this Division is that the test referred to in subsection (1) is to operate on the basis of the economic substance of the rights and obligations arising under the *scheme or schemes rather than merely on the basis of the legal form of the scheme or schemes. Note 1: The basic indicator of the economic character of a debt interest is the non‑contingent nature of the returns. The basic indicator of the economic character of an equity interest, on the other hand, is the contingent nature of the returns (or convertibility into an interest of that nature). Note 2: The test is intended to operate, for example, to: (a) deny deductibility (but allow franking) for "interest" in relation to a scheme that has the legal form of a loan if the economic substance of the rights and obligations arising under the relevant scheme gives the interest characteristics that are the same as or similar to those of a dividend on an ordinary share (and thereby prevent deductible returns on equity); and (b) allow a deduction (but not franking) for a "dividend" in relation to a scheme that has the legal form of an ordinary share if the economic substance of the rights and obligations arising under the relevant scheme gives the dividend characteristics that are the same as or similar to those of deductible interest on an ordinary loan (and thereby prevent frankable returns on debt). This will not happen if a provision in this Act specifically provides for a different treatment for the interest or dividend. (3) Another object of this Division is that the combined effect of *related schemes be taken into account in appropriate cases: (a) to ensure that the test operates effectively on the basis of the economic substance of the rights and obligations arising under the schemes rather than merely on the basis of the legal form of the schemes; and (b) to prevent the test being circumvented by entities merely entering into a number of separate schemes instead of a single scheme. (4) Another object of this Division is to identify the distributions and credits made in respect of *non‑share equity interests in a company that are to be treated as *dividends (non‑share dividends) and those that are to be treated as returns of capital (non‑share capital returns). Note: Non‑share dividends will generally be included in the recipient's assessable income and may be frankable. (5) The Commissioner must have regard to the objects stated in subsections (1) to (3) in exercising the power to make a determination under any of the following provisions: (a) subsection 974‑15(4); (b) subsection 974‑60(3), (4) or (5); (c) section 974‑65; (d) subsection 974‑70(4); (e) subsection 974‑150(2). Note: An entity can apply to the Commissioner to have a determination made and can object under Part IVC of the Taxation Administration Act 1953 if it is dissatisfied with a determination (see section 974‑112). (6) Regulations may also be made under the provisions of this Division: (a) to clarify the meaning of certain words and phrases in the light of emerging commercial practices, conditions and products; and (b) to give guidance on the detailed operation of particular provisions. The regulations must be consistent with the objects stated in subsections (1) to (3). (7) Without limiting subsection 46(2) of the Acts Interpretation Act 1901, the regulations made for the purposes of this Division may specify different rules for different classes of circumstances. Subdivision 974‑B—Debt interests Table of sections 974‑15 Meaning of debt interest 974‑20 The test for a debt interest 974‑25 Exceptions to the debt test 974‑30 Providing a financial benefit 974‑35 Valuation of financial benefit—general rules 974‑40 Valuation of financial benefits—rights and options to terminate early 974‑45 Valuation of financial benefits—convertible interests 974‑50 Valuation of financial benefits—value in present value terms 974‑55 The debt interest and its issue 974‑60 Debt interest arising out of obligations owed by a number of entities 974‑65 Commissioner's power 974‑15 Meaning of debt interest Single scheme giving rise to debt interest (1) A *scheme gives rise to a debt interest in an entity if the scheme, when it comes into existence, satisfies the debt test in subsection 974‑20(1) in relation to the entity. Note 1: A debt interest can also arise under subsection (2) (related schemes) or section 974‑65 (Commissioner's discretion). Note 2: Section 974‑55 defines various aspects of the debt interest that arises. Related schemes giving rise to debt interest (2) Two or more *related schemes (the constituent schemes) together give rise to a debt interest in an entity if: (a) the entity enters into, participates in or causes another entity to enter into or participate in the constituent schemes; and (b) a scheme with the combined effect or operation of the constituent schemes (the notional scheme) would satisfy the debt test in subsection 974‑20(1) in relation to the entity if the notional scheme came into existence when the last of the constituent schemes came into existence; and (c) it is reasonable to conclude that the entity intended, or knew that a party to the scheme or one of the schemes intended, the combined economic effects of the constituent schemes to be the same as, or similar to, the economic effects of a debt interest. This is so whether or not the constituent schemes come into existence at the same time and even if none of the constituent schemes would individually give rise to that or any other *debt interest. Note: Section 974‑105 explains the effect, for tax purposes, of actions taken under the schemes. (3) Subsection (2) does not apply if each of the *schemes individually gives rise to a *debt interest in the entity. (4) Two or more *related schemes do not give rise to a debt interest in an entity under subsection (2) if the Commissioner determines that it would be unreasonable to apply that subsection to those schemes. (5) Without limiting subsection 974‑10(5), the Commissioner must, in exercising the power to make a determination under subsection (4), have regard to the following: (a) the purpose of the *schemes (considered both individually and in combination); (b) the effects of the schemes (considered both individually and in combination); (c) the rights and obligations of the parties to the schemes (considered both individually and in combination); (d) whether the schemes (when considered either individually or in combination) provide the basis for, or underpin, an interest issued to investors with the expectation that the interest can be assigned to other investors; (e) whether the schemes (when considered either individually or in combination) comprise a set of rights and obligations issued to investors with the expectation that it can be assigned to other investors; (f) any other relevant circumstances. (6) If: (a) 2 or more *related schemes give rise to a *debt interest in an entity; and (b) one or more of those schemes (the hedging scheme or schemes) are schemes for hedging or managing financial risk; and (c) the other scheme or schemes give rise to a debt interest in the entity even if the hedging scheme or schemes are disregarded; the debt interest that arises from the schemes is taken, for the purposes of Division 820 (the thin capitalisation rules), not to include the hedging scheme or schemes. Note: This means that in these circumstances the losses associated with the hedging scheme or schemes are not debt deductions under section 820‑40. 974‑20 The test for a debt interest Satisfying the debt test (1) A *scheme satisfies the debt test in this subsection in relation to an entity if: (a) the scheme is a *financing arrangement for the entity; and (b) the entity, or a *connected entity of the entity, receives, or will receive, a *financial benefit or benefits under the scheme; and (c) the entity has, or the entity and a connected entity of the entity each has, an *effectively non‑contingent obligation under the scheme to provide a financial benefit or benefits to one or more entities after the time when: (i) the financial benefit referred to in paragraph (b) is received if there is only one; or (ii) the first of the financial benefits referred to in paragraph (b) is received if there are more than one; and (d) it is substantially more likely than not that the value provided (worked out under subsection (2)) will be at least equal to the value received (worked out under subsection (3)); and (e) the value provided (worked out under subsection (2)) and the value received (worked out under subsection (3)) are not both nil. The scheme does not need to satisfy paragraph (a) if the entity is a company and the interest arising from the scheme is an interest covered by item 1 of the table in subsection 974‑75(1) (interest as a member or stockholder of the company). Note: Section 974‑30 tells you when a financial benefit is taken to be provided to an entity. (2) The value provided is: (a) the value of the *financial benefit to be provided under the *scheme by the entity or a *connected entity if there is only one; or (b) the sum of the values of all the financial benefits provided or to be provided under the scheme by the entity or a connected entity of the entity if there are 2 or more. Note: Section 974‑35 tells you how to value financial benefits. (3) The value received is: (a) the value of the *financial benefit received, or to be received, under the *scheme by the entity or a *connected entity of the entity if there is only one; or (b) the sum of the values of all the financial benefits received, or to be received, under the scheme by the entity or a connected entity if there are 2 or more. (4) For the purposes of paragraph (1)(b) and subsections (2) and (3): (a) a *financial benefit to be provided under the *scheme by the entity or a *connected entity is taken into account only if it is one that the entity or connected entity has an *effectively non‑contingent obligation to provide; and (b) a financial benefit to be received under the scheme by the entity or a connected entity is taken into account only if it is one that another entity has an effectively non‑contingent obligation to provide. Multiple financial benefits (5) Paragraphs (1)(b) and (c) apply to 2 or more *financial benefits whether they are provided at the same time or over a period of time. Regulations (6) The regulations: (a) may specify circumstances in which paragraph (1)(d) is satisfied or not satisfied; and (b) may otherwise specify rules to be applied in determining whether or not paragraph (1)(d) is satisfied. 974‑25 Exceptions to the debt test Short term schemes (1) A *scheme does not satisfy the debt test in subsection 974‑20(1) in relation to an entity if: (a) at least a substantial part of a *financial benefit mentioned in that subsection does not consist of either of the following or a combination of either of the following: (i) a liquid or monetary asset; (ii) an amount of money; and (b) the scheme requires the financial benefit mentioned in paragraph 974‑20(1)(c) to be provided within a period of no more than 100 days of the receipt of the first financial benefit mentioned in paragraph 974‑20(1)(b); and (c) the financial benefit mentioned in paragraph 974‑20(1)(c): (i) is in fact provided within that period; or (ii) is not provided within that period because the entity required to provide the benefit neglects to provide the benefit within that period (although willing to do so); or (iii) is not provided within that period because the entity required to provide the benefit is unable to provide the benefit within that period (although willing to do so); and (d) the scheme is not one of a number of *related schemes that together are taken to give rise to a *debt interest under subsection 974‑15(2). Regulations (2) The regulations may make provision in relation to the application or operation of subsection (1). Without limiting this, the regulations may: (a) specify what constitutes a substantial part of a *financial benefit for the purposes of paragraph (1)(a); or (b) specify a period to be substituted for the period referred to in paragraph (1)(b). 974‑30 Providing a financial benefit Issue of equity interest (1) The following do not constitute the provision of a *financial benefit by an entity or a *connected entity of the entity: (a) the issue of an *equity interest in the entity or a connected entity of the entity; or (b) an amount that is to be applied in respect of the issue of an equity interest in the entity or a connected entity of the entity. Providing a financial benefit to an entity (2) A *financial benefit is taken to be provided to an entity if it is provided: (a) to the entity; or (b) on the entity's behalf; or (c) for the entity's benefit. Obligation to provide future financial benefit (3) For the avoidance of doubt, if you have a present obligation to provide a *financial benefit to an entity at some time in the future: (a) the financial benefit is taken to be a financial benefit to be provided in the future; and (b) the obligation to provide the financial benefit is taken not to be a financial benefit being provided at the present. 974‑35 Valuation of financial benefits—general rules Value in nominal terms or present value terms (1) For the purposes of this Subdivision: (a) the value of a *financial benefit received or provided under a *scheme is its value calculated: (i) in nominal terms if the performance period (see subsection (3)) must end no later than 10 years after the interest arising from the scheme is issued; or (ii) in present value terms (see section 974‑50) if the performance period must or may end more than 10 years after the interest arising from the scheme is issued; and (b) the regulations may make provisions relating to the valuation of a financial benefit. Assume scheme runs its full term (2) The value of a *financial benefit received or provided under a *scheme is calculated assuming that the interest arising from the scheme will continue to be held for the rest of its life. Note 1: Section 974‑40 makes specific provision for cases in which there is a right or option to terminate the interest early. Note 2: Section 974‑45 makes specific provision for cases involving convertible interests. Performance period (3) The performance period is the period within which, under the terms on which the interest is issued, the *effectively non‑contingent obligations of the issuer, and any *connected entity of the issuer, to provide a *financial benefit in relation to the interest have to be met. (4) An obligation is treated as having to be met within 10 years after the interest is issued if: (a) the issuer; or (b) the *connected entity of the issuer; has an *effectively non‑contingent obligation to terminate the interest within that 10 year period even if the terms on which the interest is issued formally allow the obligation to continue after the end of that 10 year period. Benefit dependent on variable factor (5) If: (a) a *financial benefit received or provided in respect of an interest depends on a factor that may vary over time (such as a variable interest rate); and (b) that factor is one commonly used in commercial arrangements; and (c) it would be unreasonable to expect any of the parties to the *scheme to know, or to anticipate accurately, the future value of that factor; and (d) that factor has a particular value (the starting value) when the scheme is entered into; the value of the financial benefit is calculated assuming that the factor's value will retain the starting value for the whole of the life of the scheme. Note: For example, the value of a return based on a floating interest rate is calculated on the basis that the interest rate remains the interest rate that is applicable when the scheme is entered into. Scheme wholly in foreign currency etc. (6) If all the *financial benefits provided and received under a *scheme are denominated in a particular foreign currency or in terms of quantities of a particular commodity or other unit of account, they are not to be converted into Australian currency for the purpose of comparing their relative values for the purposes of this Subdivision. 974‑40 Valuation of financial benefits—rights and options to terminate early (1) This section deals with the situation in which a party to a *scheme has a right or option to terminate the scheme early (whether by discharging an obligation early, converting the interest arising from the scheme into another interest or otherwise). Note 1: An example of terminating a scheme early by discharging an obligation early is terminating a loan by discharging the obligation to repay the principal (and any outstanding interest) early. Note 2: In certain circumstances, conversion of an interest into another interest can terminate its life (see section 974‑45). (2) The existence of the right or option is to be disregarded in working out the length of the life of the interest arising from the *scheme for the purposes of this Subdivision if the party does not have an *effectively non‑contingent obligation to exercise the right or option. (3) If the party does have an *effectively non‑contingent obligation to exercise the right or option, the life of the interest ends at the earliest time at which the party will have to exercise the right or option. (4) This section does not limit subsection 974‑35(2). 974‑45 Valuation of financial benefits—convertible interests (1) This section deals with the situation in which a *scheme gives rise to an *interest that will or may convert into an *equity interest in a company. (2) The life of the interest ends no later than the time when it converts into that *equity interest. (3) The possibility of the conversion is to be disregarded in working out the length of the life of the interest arising from the *scheme for the purposes of section 974‑35 if it is uncertain: (a) whether the interest will ever convert; or (b) when the interest will convert. Note: Section 974‑40 deals with the situation in which a party to the scheme may exercise a right or option to convert the interest. (4) This section does not limit subsection 974‑35(2). 974‑50 Valuation of financial benefits—value in present value terms (1) Subject to the regulations made for the purposes of subsection (5), the value in present value terms of a *financial benefit to be provided or received in respect of an interest (the test interest) is calculated under subsection (4). (2) If you need to calculate the values in present value terms of a number of *financial benefits, the value of each financial benefit is to be calculated separately. (3) The value of a *financial benefit is to be calculated assuming that all amounts to be paid by an entity in respect of the test interest are paid at the earliest time when the entity becomes liable to pay them. (4) The value of a *financial benefit in present value terms is: where: adjusted benchmark rate of return is 75% of the *benchmark rate of return on the test interest. n is the number of years in the period starting on the day on which the test interest is issued and ending on the day on which the *financial benefit is to be provided. If the period includes a part of a year, that part is to be expressed as the fraction: year means a period of 12 calendar months. (5) The regulations may provide for the method of calculating the value in present value terms of a *financial benefit. (6) Without limiting subsection (5), the regulations may: (a) provide for an entirely different method of calculating the present value of the *financial benefit; or (b) specify the adjusted *benchmark rate of return; or (c) provide for a different method of determining the adjusted benchmark rate of return; or (d) specify rules for determining whether a *debt interest is an *ordinary debt interest. 974‑55 The debt interest and its issue (1) If a *scheme, or 2 or more *related schemes, give rise to a *debt interest in an entity, the debt interest: (a) consists of the interest that carries the right to receive a *financial benefit that the entity or a *connected entity has an *effectively non‑contingent obligation to provide under the scheme or any of the schemes; and (b) is taken, subject to section 974‑60, to be a debt interest in the entity; and (c) is taken to be issued by the entity; and (d) is issued when the entity (or a connected entity of the entity) first receives a *financial benefit under the scheme or any of the schemes; and (e) is on issue while an effectively non‑contingent obligation of the entity (or a connected entity of the entity) to provide a financial benefit under the scheme or any of the schemes remains unfulfilled. (2) The interest referred to in paragraph (1)(a) may take the form of a proprietary right, a chose in action or any other form. 974‑60 Debt interest arising out of obligations owed by a number of entities (1) This section deals with the situation in which a *scheme, or a number of *related schemes together, would, apart from this section, give rise to the same *debt interest in 2 or more entities. Note: A scheme may give rise to the same debt interest in 2 or more entities if each of those entities has non‑contingent obligations to provide financial benefits under the scheme. (2) The *debt interest: (a) is a debt interest in the entity identified under subsection (3) or (4); and (b) is not a debt interest in the other entity or entities. (3) The *debt interest is a debt interest in the entity identified using the following method statement: Method statement Step 1. Work out, for each of the entities, the total value of the *financial benefits that the entity is under an *effectively non‑contingent obligation to provide under the *scheme or schemes: this is the entity's obligation value. Step 2. The *debt interest is taken to be a debt interest in the entity with the greatest obligation value. Step 3. If it is not possible to determine which entity has the greatest obligation value (whether because of an equality of, or uncertainty as to, obligation values or otherwise), the *debt interest is taken to be a debt interest in the entity agreed on by all the entities. Step 4. If the entities do not agree, the interest is taken to be a *debt interest in the entity determined by the Commissioner. (4) Despite subsection (3), the Commissioner may determine that the *debt interest is a debt interest in the entity specified in the determination. (5) The Commissioner may make the determination only if satisfied, having regard to the economic substance of the relevant transactions, that the *debt interest is properly considered from a commercial point of view to be an interest in the entity specified in the determination. 974‑65 Commissioner's power (1) Despite subsection 974‑20(1) (the debt test), the Commissioner may determine that a *scheme gives rise to a debt interest in an entity if the Commissioner considers that: (a) the scheme would satisfy paragraphs 974‑20(1)(a), (b), (c) and (e); but (b) instead of satisfying paragraph 974‑20(1)(d), the scheme would satisfy all the following subparagraphs: (i) it is substantially more likely than not that the value of the *financial benefit to be provided by the entity (or a *connected entity of the entity) under the *effectively non‑contingent obligation will be at least equal to the substantial part of the value of the financial benefit received or to be received by the entity (or its connected entity) under the scheme; (ii) it is substantially more likely than not that other financial benefits will be provided by the entity (or its connected entity) to one or more entities under the scheme; (iii) it is substantially more likely than not that the sum of the values of the financial benefits mentioned in subparagraphs (i) and (ii) will be at least equal to the value of the financial benefit received by the entity (or its connected entity) under the scheme. (2) In making the determination, the Commissioner must have regard to the following: (a) the difference between the value of the *financial benefit received and the value of the financial benefit to be provided under the *effectively non‑contingent obligation; (b) the degree of likelihood of other financial benefits being provided under the *scheme; (c) the degree of likelihood of the sum of the value of the financial benefits mentioned in subparagraphs (1)(b)(i) and (ii) being equal to or greater than the value of the financial benefit received under the scheme; (d) the particular circumstances surrounding the scheme (including circumstances of the parties to the scheme and their purposes for entering into the scheme). (3) If the Commissioner determines under this section that a *scheme gives rise to a *debt interest, the scheme has that effect for all purposes of this Division. Subdivision 974‑C—Equity interests in companies Table of sections 974‑70 Meaning of equity interest in a company 974‑75 The test for an equity interest 974‑80 Equity interest arising from arrangement funding return through connected entities 974‑85 Right or return contingent on economic performance 974‑90 Right or return at discretion of company or connected entity 974‑95 The equity interest 974‑70 Meaning of equity interest in a company Scheme giving rise to equity interest (1) A *scheme gives rise to an equity interest in a company if, when the scheme comes into existence: (a) the scheme satisfies the equity test in subsection 974‑75(1) in relation to the company because of the existence of an interest; and (b) the interest is not characterised as, and does not form part of a larger interest that is characterised as, a *debt interest in the company, or a *connected entity of the company, under Subdivision 974‑B. Note 1: An equity interest can also arise under subsection (2) if a notional scheme with the combined effect of a number of related schemes would give rise to an equity interest under this subsection. To do this, the notional scheme would need to satisfy paragraph (b). This means that the related schemes will not give rise to an equity interest if the notional scheme would be characterised as (or form part of a larger interest that would be characterised as) a debt interest in the company or a connected entity. Note 2: An equity interest can also arise under section 974‑80 (arrangements for funding return through connected entities). Note 3: Section 974‑95 defines various aspects of the equity interest that arises. Related schemes giving rise to equity interest (2) Two or more *related schemes (the constituent schemes) are taken together to give rise to an equity interest in a company if: (a) the company enters into, participates in or causes another entity to enter into or participate in the constituent schemes; and (b) a scheme with the combined effect or operation of the constituent schemes (the notional scheme) would give rise to an *equity interest in the company under subsection (1) if the notional scheme came into existence when the last of the constituent schemes came into existence; and (c) it is reasonable to conclude that the company intended, or knew that a party to the scheme or one of the schemes intended, the combined economic effects of the constituent schemes to be the same as, or similar to, the economic effects of an equity interest. This is so whether or not the constituent schemes come into existence at the same time and even if none of the constituent schemes would individually give rise to that or any other equity interest. Note: Section 974‑105 explains the effect, for tax purposes, of actions taken under the schemes. (3) Subsection (2) does not apply if each of the constituent *schemes individually gives rise to an *equity interest in the company. (4) Two or more related *schemes do not give rise to an *equity interest in a company under subsection (2) if the Commissioner determines that it would be unreasonable to apply that subsection to those schemes. (5) Without limiting subsection 974‑10(5), the Commissioner must, in exercising the power to make a determination under subsection (4), have regard to the following: (a) the purpose of the *schemes (considered both individually and in combination); (b) the effects of the schemes (considered both individually and in combination); (c) the rights and obligations of the parties to the schemes (considered both individually and in combination); (d) whether the schemes (when considered either individually or in combination) provide the basis for, or underpin, an interest issued to investors with the expectation that the interest can be assigned to other investors; (e) whether the schemes (when considered either individually or in combination) comprise a set of rights and obligations issued to investors with the expectation that it can be assigned to other investors; (f) any other relevant circumstances. 974‑75 The test for an equity interest Basic test for equity interest (1) A *scheme satisfies the equity test in this subsection in relation to a company if it gives rise to an interest set out in the following table: Equity interests Item Interest 1 An interest in the company as a member or stockholder of the company. 2 An interest that carries a right to a variable or fixed return from the company if either the right itself, or the amount of the return, is in substance or effect *contingent on the economic performance (whether past, current or future) of: (a) the company; or (b) a part of the company's activities; or (c) a *connected entity of the company or a part of the activities of a connected entity of the company. The return may be a return of an amount invested in the interest. 3 An interest that carries a right to a variable or fixed return from the company if either the right itself, or the amount of the return, is at the discretion of: (a) the company; or (b) a *connected entity of the company. The return may be a return of an amount invested in the interest. 4 An interest issued by the company that: (a) gives its holder (or a *connected entity of the holder) a right to be issued with an *equity interest in the company or a *connected entity of the company; or (b) is an *interest that will, or may, convert into an equity interest in the company or a connected entity of the company. This subsection has effect subject to subsection (2) (requirement for financing arrangement). Note: Section 974‑90 allows regulations to be made clarifying when a right or return is taken to be at discretion of a company or connected entity. Financing arrangement (2) A *scheme that would otherwise give rise to an *equity interest in a company because of an item in the table in subsection (1) (other than item 1) does not give rise to an equity interest in the company unless the scheme is a *financing arrangement for the company. Form interest may take (3) The interest referred to in item 2, 3 or 4 in the table in subsection (1) may take the form of a proprietary right, a chose in action or any other form. Exception for certain at call loans—until 31 December 2002 (4) If: (a) a *financing arrangement takes the form of a loan to a company by a *connected entity; and (b) the loan does not have a fixed term; and (c) under the arrangement the loan is repayable on demand by the connected entity; and (d) the arrangement was entered into on or after 21 February 2001; the arrangement does not give rise to an equity interest in the company. Instead, the arrangement is taken, despite anything in Subdivision 974‑B, to give rise to a debt interest in the company. This subsection ceases to have effect on 1 January 2003. 974‑80 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). Example: Company A, Company B1, Company B2 and Company B3 are connected entities. Company B1 operates Trust Fund C. An interest in Trust Fund C is issued to person H and the return on that interest is contingent on the economic performance of Company A. Trust Fund C lends the money paid by H for the purchase of the interest to Company B1 which lends the money to Company B2 which lends the money to Company B3 which lends the money to Company A. Under the arrangements under which the interest is issued and the loans made, payments of interest by Company A on the loan that Company B3 makes to Company A are intended to pass back through Company B2 and Company B1 to fund the return on H's interest in Trust Fund C. Under subsection (2), Company B3 will have an equity interest in Company A. If the return to Company B3 were itself contingent on Company A's performance, Company B3's interest would be an equity interest in Company A under item 2 of the table in subsection 974‑75(1) (and not under subsection (2) of this section). Company B2 has an equity interest in Company B3 and Company B1 has an equity interest in Company B2. This is because the returns they get are intended to fund the return on H's interest in Trust Fund C and that return is contingent on the economic performance of Company A (which is related to both Company B3 and Company B2). (3) The interest referred to in paragraph (1)(a) or (2)(c) may take the form of a proprietary right, a chose in action or any other form. 974‑85 Right or return contingent on economic performance (1) A right, or the amount of a return, is not contingent on the economic performance of an entity, or a part of the entity's activities, merely because the right or return is contingent on: (a) the ability or willingness of an entity to meet the obligation to satisfy the right to the return; or (b) the receipts or turnover of the entity or the turnover generated by those activities. (2) The regulations may specify circumstances in which a right or return is to be taken to be contingent, or not contingent, on the economic performance of an entity or a part of an entity's activities. (3) The regulations may provide that paragraph (1)(b) does not apply in the circumstances specified in the regulations. (4) The regulations may provide that an interest that: (a) is covered by item 2 in the table in subsection 974‑75(1) or paragraph 974‑80(2)(a); and (b) arises in the circumstances specified in the regulations; is not an equity interest because of: (c) the limited extent to which the right or return that the interest carries is *contingent on the economic performance of an entity or a part of the entity's activities; or (d) the practical insignificance of the right or return that the interest carries being contingent on that performance. 974‑90 Right or return at discretion of company or connected entity The regulations may specify circumstances in which a right, or the amount of a return, is to be taken to be at the discretion of a company or a *connected entity of the company. 974‑95 The equity interest (1) If a *scheme gives rise to an *equity interest in a company because of an item of the table in subsection 974‑75(1), the equity interest consists of the interest referred to in that item. (2) If 2 or more *related schemes give rise to an *equity interest in a company because of an item of the table in subsection 974‑75(1), the equity interest consists of the combination of interests under the schemes that satisfy the requirements of that item. (3) Subsection 974‑80(2) also provides that certain interests are *equity interests in a company. (4) If the returns on a *non‑share equity interest in a company are payable to 2 or more entities: (a) each entity is taken to be the holder of a non‑share equity interest in the company; and (b) each entity's non‑share equity interest consists of the interests that: (i) constitute the non‑share equity interest; and (ii) are held by that entity. (5) The company in which an *equity interest exists is taken to be the issuer of the interest. Subdivision 974‑D—Common provisions Table of sections 974‑100 Treatment of convertible and converting interests 974‑105 Effect of action taken in re