Commonwealth Consolidated Acts Commonwealth Consolidated Acts(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 aspects of 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 aspects of 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 aspects of 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.