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INCOME TAX ASSESSMENT ACT 1997

CHAPTER 6 - THE DICTIONARY  

PART 6-1 - CONCEPTS AND TOPICS  

Division 974 - Debt and equity interests    View history reference

Subdivision 974-C - Equity interests in companies  

SECTION 974-75  The test for an equity interest  

 View history reference

Basic test for equity interest

974-75(1)  

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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
ItemInterest
1An interest in the company as a member or stockholder of the company.
.......... 
2An 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 aspects of 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.
.......... 
3An 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.
.......... 
4An 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

974-75(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

974-75(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 30 June 2005

974-75(4)  

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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) either:

(i) the loan is repayable on demand made by the connected entity, and repayment is required immediately on the making of the demand, or is required at the end of a particular period after the demand is made (being a period that is not longer than is reasonably necessary to arrange repayment); or

(ii) the loan is repayable on the death of the connected entity (if the connected entity is an individual); and
 View history reference


(d) the arrangement was entered into on or before 30 June 2005;
 View history reference

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 July 2005.

Note:

If this subsection ceases to have effect in relation to an interest that is, according to the other provisions of this Division, an equity interest immediately after the cessation, an adjustment to the company's non-share capital account will occur at that time (see subsection 164-15(2)).

974-75(5)  

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If, while subsection (4) applies to a *financing arrangement, a circumstance occurs that would otherwise have attracted the operation of subsection 974-110(1) or (2) in relation to the arrangement:


(a) that subsection of section 974-110 does not apply to change the result that subsection (4) of this section produces in relation to the arrangement; but


(b) for the purpose of applying this Division in relation to the arrangement after subsection (4) of this section has ceased to have effect, that subsection of section 974-110 is taken to have produced the result that it would have produced if subsection (4) of this section had not applied to the arrangement.

Further exception for certain related party at call loans

974-75(6)  

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In applying this Division in relation to a particular *scheme and a particular income year (which may be the income year in which the scheme is entered into or a later income year), the scheme is taken not to give rise to an equity interest in a company, and instead to give rise to a debt interest in the company, if:


(a) the scheme takes the form of a loan to the company that satisfies paragraphs (4)(a), (b) and (c); and


(b) the company's *GST turnover (worked out at the end of the income year) is less than $20,000,000.
 View history reference

Note:

If this subsection does not apply in relation to the previous income year or the next income year, and the scheme gives rise to an equity interest according to the other provisions of this Division, an adjustment to the company's non-share capital account will occur at the end of the previous income year or the start of the next income year (see subsections 164-15(2) and 164-20(3)).

974-75(7)  

 View history reference
For the purpose of paragraph (6)(b), the question whether a company's *GST turnover (worked out at the end of an income year) is less than $20,000,000 is to be determined in accordance with subsection 188-10(2) of the *GST Act, as if that amount of $20,000,000 were a turnover threshold for the purposes of that subsection of the GST Act.


 



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