Commonwealth Consolidated Acts Commonwealth Consolidated ActsDebt deduction limitation rule
(1) This subsection disallows all or part of a * debt deduction of an entity for an income year if, for that year:
(a) the entity is any of the following for that year:
(i) a * general class investor;
(ii) an * outward investing financial entity (non - ADI);
(iii) an * inward investing financial entity (non - ADI); and
(aa) the entity is not a * securitisation vehicle; and
(b) subsection (2) or (5) applies.
Note 1: This Subdivision does not apply if the total debt deductions of that entity and all its associate entities for that year are $2 million or less: see section 820 - 35.
Note 1A: This Subdivision does not apply to certain special purpose entities: see section 820 - 39.
Note 2: To work out the amount to be disallowed, see section 820 - 423B.
Acquisition of CGT asset, or legal or equitable obligation
(2) This subsection applies if all of the following conditions are satisfied:
(a) an entity (the acquirer ) * acquires a * CGT asset, or a legal or equitable obligation, either directly, or indirectly through one or more interposed entities , from one or more other entities (each of which is a disposer );
(b) one or more of the disposers (each of which is an associate disposer ) is an * associate pair of the acquirer;
(c) the entity mentioned in subsection (1) (the relevant entity ) is:
(i) the acquirer; or
(ii) an associate pair of the acquirer; or
(iii) an associate pair of an associate disposer;
(d) the relevant entity's * debt deduction mentioned in subsection (1) is, wholly or partly, in relation to any of the following:
(i) the acquisition mentioned in paragraph (a) of this subsection;
(ii) the acquirer's holding of the CGT asset, or legal or equitable obligation;
(e) the relevant entity's debt deduction mentioned in subsection (1) is referable to an amount paid or payable, either directly or indirectly, to any of the following:
(i) an associate pair of the relevant entity;
(ii) an associate pair of the acquirer;
(iii) an associate pair of an associate disposer;
(f) the acquisition mentioned in paragraph (a) of this subsection is not covered by section 820 - 423AA (which is about exceptions);
(g) the relevant entity has not made a choice under subsection 820 - 46(4) to use the third party debt test for the income year mentioned in subsection (1) of this section.
(3) To avoid doubt, subsection (2) may apply more than once in relation to the * acquisition of a * CGT asset, or a legal or equitable obligation.
(3A) For the purposes of subsection (2):
(a) that subsection may apply in relation to an indirect * acquisition by an entity through one or more interposed entities even if an acquisition in the series is covered by section 820 - 423AA (which is about exceptions); and
(b) in determining whether an acquisition occurs indirectly through one or more interposed entities:
(i) it is sufficient if acquisitions exist between each entity; and
(ii) it is not necessary to demonstrate that each acquisition in a series of acquisitions happened before the next acquisition.
Example: Entity A acquires a membership interest in Entity B that is covered by the exception in subsection 820 - 423AA(1). Entity B later acquires, from Entity C, a CGT asset that is not covered by an exception in that section. There may be an indirect acquisition of the CGT asset by Entity A.
(4) For the purposes of subsections (2), (3) and (3A), disregard paragraph (b) of the definition of "acquire" in subsection 995 - 1(1).
Financial arrangements involving associate pairs
(5) This subsection applies if all of the following conditions are satisfied:
(a) an entity (the payer ) enters into, or has a * financial arrangement with another entity;
(b) the payer uses the financial arrangement to:
(i) fund; or
(ii) facilitate the funding of;
one or more payments or distributions, of which one or more is a payment or distribution that, to an extent:
(iii) the payer makes to an entity (an associate recipient ) that is an * associate pair of the payer; and
(iv) is covered by subsection (5A) (which is about types of payments or distributions);
(c) the entity mentioned in subsection (1) (the relevant entity ) is any of the following:
(i) the payer;
(ii) an associate pair of the payer;
(iii) an associate pair of an associate recipient;
(d) the relevant entity's * debt deduction mentioned in subsection (1) is, wholly or partly, in relation to the financial arrangement mentioned in paragraph (a) of this subsection;
(e) the relevant entity's debt deduction is referable to an amount paid or payable, either directly or indirectly, to any of the following:
(i) an associate pair of the relevant entity;
(ii) an associate pair of the payer;
(iii) an associate pair of an associate recipient;
(f) the relevant entity has not made a choice under subsection 820 - 46(4) to use the third party debt test for the income year mentioned in subsection (1) of this section.
(5A) This subsection covers the following:
(a) a * dividend, * distribution or * non - share distribution;
(b) a distribution by a trustee or partnership;
(c) a return of capital, including a return of capital made by a distribution or payment made by a trustee or partnership;
(d) a payment or distribution in respect of the cancellation or redemption of a * membership interest in an entity;
(e) a * royalty, or a similar payment or distribution for the use of, or right to use, an asset;
(f) a payment or distribution that is wholly or partly referable to the repayment of principal under a * debt interest if:
(i) the debt interest is issued by the payer; and
(ii) the debt interest is a * financial arrangement that satisfies paragraphs (5)(a), (b) and (c);
(g) a payment or distribution of a kind similar to a payment or distribution mentioned in the preceding paragraphs;
(h) a payment or distribution prescribed by the regulations.
(6) For the purposes of paragraph (5)(b):
(a) the payments or distributions mentioned in that paragraph may be made:
(i) directly, or indirectly through one or more interposed entities (see subsection (7)); and
(ii) before, at or after the time the payer enters into or has the * financial arrangement mentioned in paragraph (5)(a); and
(b) a recipient may be the entity with whom the payer enters into or has the financial arrangement, or another entity.
(7) For the purposes of subparagraph (6)(a)(i), in determining whether a payment or distribution is made indirectly through one or more interposed entities:
(a) it is sufficient if payments exist between each interposed entity; and
(b) it is not necessary to demonstrate that each payment in a series of payments funds the next payment, or is made after the previous payment.