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TAXATION LAWS AMENDMENT ACT (NO. 5) 2003 NO. 142, 2003 - SCHEDULE 2

- Thin Capitalisation: amendments taking effect on 1 July 2002 Part 1—Application of amendments

1 Application

The amendments made by this Schedule (except Part 5) apply in relation to an income year that begins on or after 1 July 2002.

Part 2—Records about Australian permanent establishments

Income Tax Assessment Act 1997

2 Section 820-960

Repeal the section, substitute:

820-960 Records about Australian permanent establishments
(1)
If an entity:

(a) is an * inward investor (general), * inward investor (financial) or * inward investing entity (ADI), for all or a part of an income year; and
(b) carries on its * business at or through one or more of its * Australian permanent establishments throughout that year; and
(c) has total revenues attributable to those Australian permanent establishments for that year that are at least $2,000,000;

the entity must keep for that year the records for which subsection (1A) or (1B) provides.

Note: A person must comply with the requirements in section 262A of the Income Tax Assessment Act 1936 about the keeping of these records (see subsections (2AA) and (3) of that section) .

Australian accounting standards

(1A)
If the entity chooses this subsection, it must keep the following records for the * Australian permanent establishments:

(a) a statement of financial position (within the meaning of the * accounting standards);
(b) a statement of financial performance (within the meaning of those standards).

The statements must:

(c) be prepared in accordance with the * accounting standards (in particular, but not limited to, accounting standards AASB 1001, AASB 1018 and AASB 1040); and
(d) include all the notes required to accompany them under the standards.

Overseas and international accounting standards

(1B)
If the entity chooses this subsection, it must keep for the * Australian permanent establishments the statements (however described) that, under standards covered by subsection (1C) or (1D) (the overseas or international accounting standards ), correspond to the statements referred to in subsection (1A). The statements must:

(a) be prepared in accordance with those standards; and
(b) include all the notes required to accompany them under those standards.

(1C)
This subsection covers the standards (however described) that correspond to the * accounting standards and are made by the responsible body in:

(a) the United Kingdom of Great Britain and Northern Ireland; or
(b) the United States of America; or
(c) Canada; or
(d) New Zealand; or
(e) Japan; or
(f) the French Republic; or
(g) the Federal Republic of Germany.

(1D)
This subsection covers the international accounting standards made or adopted by the International Accounting Standards Board.

Requirements for the records under subsection (1A) or (1B)

(2)
The entity must prepare the records for which subsection (1A) or (1B) provides:

(a) before the time by which the entity must lodge its tax return for the income year; and
(b) as if:
(i) the * Australian permanent establishments were an entity (the notional entity ) for which those records would be required to be prepared under the * accounting standards or the overseas or international accounting standards, as appropriate; and
(ii) for the purposes of the statement of financial position or the corresponding statement, as appropriate—the assets, liabilities (including * debt capital) and * equity capital that are attributable to the Australian permanent establishments for that income year were assets, liabilities and equity of the notional entity for that year; and
(iii) for the purposes of the statement of financial performance or the corresponding statement, as appropriate—the revenues and expenses that are attributable to the Australian permanent establishments for that year were the revenues and expenses of the notional entity for that year; and
(iv) the * accounting standards, or the overseas or international accounting standards, as appropriate, referred to income years instead of financial years or the corresponding term in the overseas or international accounting standards.

Commissioner's power to exempt from complying with Australian accounting standards

(4)
The Commissioner may decide that an entity, or entities in a class of entities, need not comply with all or any part of the * accounting standards for one or more income years for the purposes of subsection (1A) if the Commissioner is satisfied that it would be unreasonable that the entity, or the entities in that class, be required to do so.

Note: The Commissioner's power under this subsection does not extend to the overseas or international accounting standards.

(5)
The Commissioner:

(a) may make a decision under subsection (4) in such cases and to such extent as the Commissioner thinks fit; and
(b) must make the decision in writing; and
(c) cause a copy of the decision to be published in the Gazette .

The decision has effect despite subsection (1A).

Excluding Australian permanent establishments not covered by applicable double tax treaty

(6)
An entity need not comply with this section for an income year in relation to an * Australian permanent establishment if:

(a) throughout that year, the entity was, for the purposes of a double tax agreement (within the meaning of Part X of the Income Tax Assessment Act 1936 ) in relation to a foreign country, a resident of that foreign country (even if the entity was also an Australian resident or a resident of another foreign country); and
(b) throughout the period during that year when the entity was carrying on its * business at or through that Australian permanent establishment, the Australian permanent establishment was not a permanent establishment within the meaning of that double tax agreement.

Income Tax Assessment Act 1936

3 Paragraph 262A(3)(c)

Omit "subsections (2) to (4)", substitute "the applicable provisions".

Part 3—Equity interests excluded in working out safe harbour debt amount

Income Tax Assessment Act 1997

4 Section 820-10 (table item 8A)

After "cost-free debt capital", insert ", and excluded equity interest,".

5 Section 820-95 (after step 1 of the method statement)

Insert:

Step 1A. Reduce the result of step 1 by the average value, for that year, of all the * excluded equity interests in the entity.

6 Section 820-95 (step 2 of the method statement)

Omit "step 1", substitute "step 1A".

7 Subsection 820-100(2) (after step 1 of the method
statement)

Insert:

Step 1A. Reduce the result of step 1 by the average value, for that year, of all the * excluded equity interests in the entity.

8 Subsection 820-100(2) (step 2 of the method statement)

Omit "step 1", substitute "step 1A".

9 Subsection 820-100(3) (after step 1 of the method
statement)

Insert:

Step 1A. Reduce the result of step 1 by the average value, for that year, of all the * excluded equity interests in the entity.

10 Subsection 820-100(3) (step 2 of the method statement)

Omit "step 1", substitute "step 1A".

11 Section 820-195 (after step 1 of the method
statement)

Insert:

Step 1A. Reduce the result of step 1 by the average value, for that year, of all the * excluded equity interests in the entity.

12 Section 820-195 (step 2 of the method statement)

Omit "step 1", substitute "step 1A".

13 Subsection 820-200(2) (after step 1 of the method
statement)

Insert:

Step 1A. Reduce the result of step 1 by the average value, for that year, of all the * excluded equity interests in the entity.

14 Subsection 820-200(2) (step 2 of the method statement)

Omit "step 1", substitute "step 1A".

15 Subsection 820-200(3) (after step 1 of the method
statement)

Insert:

Step 1A. Reduce the result of step 1 by the average value, for that year, of all the * excluded equity interests in the entity.

16 Subsection 820-200(3) (step 2 of the method statement)

Omit "step 1", substitute "step 1A".

17 Section 820-205 (after step 1 of the method
statement)

Insert:

Step 1A. Reduce the result of step 1 by the average value, for that year, of all the * excluded equity interests in the entity.

18 Section 820-205 (step 2 of the method statement)

Omit "step 1", substitute "step 1A".

19 Subsection 820-210(2) (after step 1 of the method
statement)

Insert:

Step 1A. Reduce the result of step 1 by the average value, for that year, of all the * excluded equity interests in the entity.

20 Subsection 820-210(2) (step 2 of the method statement)

Omit "step 1", substitute "step 1A".

21 Subsection 820-210(3) (after step 1 of the method
statement)

Insert:

Step 1A. Reduce the result of step 1 by the average value, for that year, of all the * excluded equity interests in the entity.

22 Subsection 820-210(3) (step 2 of the method statement)

Omit "step 1", substitute "step 1A".

23 Subdivision 820-KA (heading)

Repeal the heading, substitute:

Subdivision 820-KA—Cost-free debt capital and excluded equity interests 24 Section 820-945

After "cost-free debt capital", insert ", and excluded equity interest,".

25 Section 820-946 (heading)

Repeal the heading, substitute:

820-946 Cost-free debt capital and excluded equity interest 26 Subsection 820-946(1)

After "period" (first occurring), insert "(the relevant period )".

27 Subsection 820-946(2)

Omit "If subsection (1) applies to an entity for a period (the relevant period ), the", substitute "The".

28 After subsection 820-946(2)

Insert:

(2A)
An * equity interest in the entity is an excluded equity interest at a particular time during the relevant period if, and only if:

(a) if subsection (1) does not apply to the holder of the interest for all or part of the relevant period:
(i) the entity is an * associate of the holder; and
(ii) at that time, the interest has been * on issue for a period of less than 180 days; or
(b) if subsection (1) applies to the holder for all or part of the relevant period:
(i) the entity is an associate of the holder; and
(ii) at that time, the interest has been on issue for a period of less than 180 days; and
(iii) the interest is covered by subsection (3) at that time.

29 Subsection 820-946(3)

After " * debt interest", insert "or * equity interest".

33 Subsection 995-1(1)

Insert:

"excluded equity interest" has the meaning given by section 820-946.

34 Subsection 995-1(1) (definition of on issue )

Repeal the definition, substitute:

"on issue":

(a) a * debt interest is on issue as provided in paragraph 974-55(1)(e); and
(b) an * equity interest in an entity:
(i) is on issue from when it is issued until it stops being on issue because of subparagraph (ii); and
(ii) stops being on issue when, for reasons other than the economic performance of the entity (or of a * connected entity of the entity), there is no longer a reasonable likelihood that a substantial * financial benefit will be provided in respect of the interest under the * scheme, or under any of the schemes, that give rise to the interest.

Part 4—Adjusted average equity capital for grouping purposes

Income Tax Assessment Act 1997

35 Subsection 820-562(3)

Repeal the subsection (but not the note or the table), substitute:

(3)
The amount worked out under this subsection as at a particular day is:

(a) the total of the amounts worked out under the table below for each member of the group that is covered by an item in the table and is in the group on that day (except so much of that total as is attributable to any of the * overseas permanent establishments of such members); minus
(b) the total of the * controlled foreign equity, at the end of that day, of each member of the group that is in the group on that day (except so much of that total as is attributable to any of the overseas permanent establishments of such members).

36 Subsection 820-589(3)

Omit all the words from and including "The amount" to and including "consolidated accounts:", substitute "The amount worked out under this subsection as at a particular day is:".

37 Paragraphs 820-589(3)(a) and (b)

Repeal the paragraphs, substitute:

(a) the total of the amounts worked out under the table below for each entity that is a * member of the group on that day (except so much of that total as is attributable to any of the * overseas permanent establishments of such entities); minus
(b) the total of the * controlled foreign equity, at the end of that day, of each such entity (except so much of that total as is attributable to any of the overseas permanent establishments of such entities).

38 Subsection 820-589(3) (note)

Repeal the note.

39 At the end of section 820-589

Add:

(4)
The amounts referred to in paragraphs (3)(a) and (b) are to be worked out, so far as practicable, on the basis of the information that would be contained in a set of consolidated accounts:

(a) prepared, in accordance with the * accounting standard on consolidated accounts, as at the end of that day; and
(b) covering the * members of the group as at the end of that day.

Note: This subsection does not depend on whether such a set of consolidated accounts was prepared, or had to be prepared, for other purposes.

40 Paragraphs 820-613(3)(a) and (b)

Repeal the paragraphs, substitute:

(a) in the case of a choice under section 820-597:
(i) the amounts worked out under the table in subsection 820-589(3) for that day for each entity that is a * member of the group on that day (except so much of those amounts as is attributable to any of the * overseas permanent establishments of such entities); minus
(ii) the total of the * controlled foreign equity, at the end of that day, of each such entity (except so much of that total as is attributable to any of the overseas permanent establishments of such entities); and
(b) in the case of a choice under section 820-599:
(i) the amount worked out under the table in subsection 820-589(3) for that day for the single company (except so much of that total as is attributable to any of the single company's overseas permanent establishments); minus
(ii) the single company's controlled foreign equity, at the end of that day (except so much of it as is attributable to any of the single company's overseas permanent establishments); and

Part 5—Disallowed deductions not included in cost base of a CGT asset

Income Tax Assessment Act 1997

41 At the end of Subdivision 110-A

Add:

110-54 Debt deductions disallowed by thin capitalisation rules
Expenditure does not form part of the third element of the cost base to the extent that Division 820 (Thin capitalisation rules) prevented or prevents you, or a partnership in which you are or were a partner, from deducting it.

42 At the end of section 820-115

Add:

Note: The disallowed amount also does not form part of the cost base of a CGT asset. See section 110-54.

43 At the end of section 820-220

Add:

Note: The disallowed amount also does not form part of the cost base of a CGT asset. See section 110-54.

44 At the end of section 820-325

Add:

Note: The disallowed amount also does not form part of the cost base of a CGT asset. See section 110-54.

45 At the end of section 820-415

Add:

Note: The disallowed amount also does not form part of the cost base of a CGT asset. See section 110-54.

46 Section 820-465 (note)

Omit "Note", substitute "Note 1".

47 At the end of section 820-465

Add:

Note 2: The disallowed amount also does not form part of the cost base of a CGT asset. See section 110-54.

48 Section 820-605 (before Note 1)

Insert:

Note 1A: The disallowed amount also does not form part of the cost base of a CGT asset. See section 110-54.

49 Application

The amendments made by this Part (except items 50 and 51) do not apply for the purposes of working out a capital gain made from a CGT event happening before 1 July 2002.

Taxation Laws Amendment Act (No. 7) 2000

50 Item 31 of Schedule 4

Omit "Before section 110-40", substitute "After the group heading before section 110-40".

51 Application

Item 31 of Schedule 4 to the Taxation Laws Amendment Act (No. 7) 2000 is taken always to have had effect as amended by item 50 of this Schedule.

Part 6—Premium excess amount

Income Tax Assessment Act 1997

52 Subsection 820-920(3) (step 2 of the method statement)

Repeal the step, substitute:

Step 2. Work out the value, as at that time, of all the * equity capital of the * associate entity that is attributable to * equity interests that the relevant entity holds in the associate entity at that time (except equity interests whose value is all or a part of the relevant entity's * controlled foreign entity equity at that time).

Part 7—Attributable safe harbour excess amount

Income Tax Assessment Act 1997

53 Subsection 820-920(4) (at the end of step 1 of the method
statement)

Add:

; and (d) if the associate entity would otherwise be treated as an * inward investor (financial) for that day and the relevant entity is not a financial entity throughout that day—the associate entity were an * inward investor (general) for that day.


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