Commonwealth Consolidated Acts

INCOME TAX ASSESSMENT ACT 1997 - SECT 974.5

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).