Commonwealth Consolidated Acts

TAXATION LAWS AMENDMENT ACT (NO. 4) 2002 - SCHEDULE 1

Part   1 -- Amendments

Income Tax Assessment Act 1997

1   Section   820 - 10 (after table item   5)

Insert:

2   Section   820 - 10 (after table item   8)

Insert:

3   After section   820 - 30

Insert:

820 - 32   Exemption for private or domestic assets and non - debt liabilities

    This Division does not apply to:

  (a)   an asset that is used (or held for use) wholly or principally for private or domestic purposes; or

  (b)   a * non - debt liability that is wholly or principally of a private or domestic nature.

4   Section   820 - 37 (definition of average Australian assets )

Repeal the definition, substitute:

"average Australian assets" :

  (a)   of an * Australian entity--is the average value, for that year, of all the assets of the entity, other than:

  (i)   any assets attributable to the entity's * overseas permanent establishments; or

  (ii)   any * debt interests held by the entity, to the extent to which any value of the interests is all or a part of the * controlled foreign entity debt of the entity; or

  (iii)   any * equity interests or debt interests held by the entity, to the extent to which any value of the interests is all or a part of the * controlled foreign entity equity of the entity; or

  (iv)   any debt interests that are * issued by * associates of the entity, that are * on issue, and that are held by the entity; or

  (v)   any equity interests that the entity holds in associates of the entity; and

  (b)   of a * foreign entity--is the average value, for that year, of all the assets of the entity that are:

  (i)   located in Australia; or

  (ii)   attributable to the entity's * Australian permanent establishments; or

  (iii)   debt interests held by the entity, to the extent to which the interests are covered by subsection   ( 2); or

  (iv)   equity interests held by the entity, to the extent to which the interests are covered by subsection   ( 3);

    other than:

  (v)   any debt interests that are issued by associates of the entity, that are on issue, and that are held by the entity; or

  (vi)   any equity interests that the entity holds in associates of the entity.

5   Section   820 - 37 (definition of average total assets )

Repeal the definition, substitute:

"average total assets" of an entity is the average value, for that year, of all the assets of the entity, other than:

  (a)   any * debt interests that are * issued by * associates of the entity, that are * on issue, and that are held by the entity; or

  (b)   any * equity interests that the entity holds in associates of the entity.

6   At the end of section   820 - 37

Add:

Foreign entity--debt interest issued by an Australian entity

  (2)   If a * foreign entity holds a * debt interest that:

  (a)   was * issued by an * Australian entity; and

  (b)   is * on issue;

this subsection covers the interest to the extent to which the interest is not attributable to any * foreign permanent establishments of the Australian entity.

Foreign entity--equity interest in an Australian entity

  (3)   If a * foreign entity holds an * equity interest in an * Australian entity, this subsection covers the interest to the extent to which the interest is not attributable to any * foreign permanent establishments of the Australian entity.

7   Subsection 820 - 85(3) (step 2 of the method statement)

Omit "(other than any * controlled foreign entity debt of the entity)".

8   Subsection 820 - 85(3) (step 5 of the method statement)

Repeal the step, substitute:

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

Omit ", other than associate entity debt that is * controlled foreign entity debt of the entity".

10   Section   820 - 95 (step 3 of the method statement)

Omit ", other than associate entity equity that is * controlled foreign entity equity of the entity".

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

Omit ", other than associate entity debt that is * controlled foreign entity debt of the entity".

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

Omit ", other than associate entity equity that is * controlled foreign entity equity of the entity".

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

Omit ", other than associate entity equity that is * controlled foreign entity equity of the entity".

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

Omit ", other than associate entity debt that is * controlled foreign entity debt of the entity".

15   Section   820 - 115 (definition of average debt )

Repeal the definition, substitute:

"average debt" means the sum of:

  (a)   the average value, for the income year, of the entity's * debt capital that is covered by step 1 of the method statement in subsection 820 - 85(3); and

  (b)   the average value, for that year, of the entity's * cost - free debt capital that is covered by step 5 of that method statement;

(disregarding any amount that is attributable to the entity's * overseas permanent establishments in working out the average values).

16   Subsection 820 - 120(2) (step 2 of the method statement)

Omit "(other than any * controlled foreign entity debt of the entity)".

17   Subsection 820 - 120(2) (step 5 of the method statement)

Repeal the step, substitute:

18   Subsection 820 - 120(4) (definition of average debt in table item   4)

Repeal the definition, substitute:

19   Subsection 820 - 185(3) (step 4 of the method statement)

Repeal the step, substitute:

20   Section   820 - 220 (definition of average debt )

Repeal the definition, substitute:

"average debt" means the sum of:

  (a)   the average value, for the income year, of the entity's * debt capital that is covered by step 1 of the method statement in subsection 820 - 185(3); and

  (b)   the average value, for that year, of the entity's * cost - free debt capital that is covered by step 4 of that method statement.

21   Subsection 820 - 225(2) (step 4 of the method statement)

Repeal the step, substitute:

22   Subsection 820 - 225(3) (definition of average debt in table item   4)

Repeal the definition, substitute:

23   Subsection 820 - 815(2)

Repeal the subsection, substitute:

  (2)   This section does not apply to an * associate entity of the entity if:

  (a)   the associate entity is a * foreign entity and the associate entity is such an associate entity only because of subsection 820 - 905(3A); or

  (b)   the associate entity is such an associate entity only because of subsection 820 - 905(3B).

24   Subsection 820 - 820(3)

Omit "This subsection does not apply to an associate entity of the entity if it is such an associate entity only because of subsection 820 - 905(3B).".

25   After subsection 820 - 820(3)

Insert:

  (3A)   Subsection   ( 3) does not apply to an * associate entity of the entity if:

  (a)   the associate entity is a * foreign entity and the associate entity is such an associate entity only because of subsection 820 - 905(3A); or

  (b)   the associate entity is such an associate entity only because of subsection 820 - 905(3B).

26   Subsection 820 - 825(2)

Omit "This subsection does not apply to an associate entity of one or more entities in the group if it is such an associate entity only because of subsection 820 - 905(3B).".

27   After subsection 820 - 825(2)

Insert:

  (2A)   Subsection   ( 2) does not apply to an * associate entity of one or more entities in the group if:

  (a)   the associate entity is a * foreign entity and the associate entity is such an associate entity only because of subsection 820 - 905(3A); or

  (b)   the associate entity is such an associate entity only because of subsection 820 - 905(3B).

28   After section   820 - 875

Insert:

Subdivision   820 - HA -- Controlled foreign entity debt and controlled foreign entity equity

Guide to Subdivision   820 - HA

820 - 880   What this Subdivision is about

Controlled foreign entity debt and controlled foreign entity equity are concepts used in this Division. This Subdivision sets out the meaning of each of these concepts.

Table of sections

820 - 881   Application

820 - 885   What is controlled foreign entity debt ?

820 - 990   What is controlled foreign entity equity ?

[This is the end of the Guide.]

820 - 881   Application

    This Subdivision applies to:

  (a)   an entity (the relevant entity ) that is an * outward investing entity (non - ADI), or an * outward investing entity (ADI), for a period (the relevant period ) that is all or a part of an income year; and

  (b)   each entity ( controlled entity of the relevant entity ) that is an * Australian controlled foreign entity of which:

  (i)   the relevant entity is an * Australian controller; or

  (ii)   an * associate entity of the relevant entity is an Australian controller.

820 - 885   What is controlled foreign entity debt ?

  (1)   The relevant entity's controlled foreign entity debt at a particular time during the relevant period is the total value of all the * debt interests held by the relevant entity at that time that satisfy all of the following:

  (a)   the interests are * on issue at that time;

  (b)   each of the interests was * issued by an entity that is a controlled entity of the relevant entity at that time;

  (c)   each of the interests gives rise to a cost, at any time, that is covered by paragraph 820 - 40(1)(a).

  (2)   For the purposes of subsection   ( 1), take into account the value of a * debt interest issued by a controlled entity of the relevant entity only to the extent that the interest is not attributable to any of the following assets that are held by the controlled entity throughout the relevant period:

  (a)   assets attributable to the controlled entity's * Australian permanent establishments;

  (b)   other assets that are held by the controlled entity for the purposes of producing assessable income of the controlled entity.

820 - 890   What is controlled foreign entity equity ?

  (1)   The relevant entity's controlled foreign entity equity at a particular time during the relevant period is the total value of:

  (a)   all the * equity interests that the entity holds, at that time, in entities that are controlled entities of the relevant entity at that time; and

  (b)   all the * debt interests * on issue and held by the entity at that time that satisfy both of the following:

  (i)   the interests were * issued by entities that are controlled entities of the relevant entity at that time;

  (ii)   none of the interests gives rise to any cost, at any time, that is covered by paragraph 820 - 40(1)(a).

  (2)   For the purposes of subsection   ( 1), take into account the value of an * equity interest in, or a * debt interest issued by, a controlled entity of the relevant entity only to the extent that the interest is not attributable to any of the following assets that are held by the controlled entity throughout the relevant period:

  (a)   assets attributable to the controlled entity's * Australian permanent establishments;

  (b)   other assets that are held by the controlled entity for the purposes of producing assessable income of the controlled entity.

29   Section   820 - 910

Repeal the section, substitute:

820 - 910   Associate entity debt

  (1)   This section applies to an entity (the relevant entity ) that is an * outward investing entity (non - ADI), or an * inward investing entity (non - ADI), for a period (the relevant period ) that is all or a part of an income year.

  (2)   This section also applies, for the relevant entity, to each entity ( relevant associate entity ) that is an * associate entity of the relevant entity and that satisfies all of the following:

  (a)   one of the following applies to the relevant associate entity:

  (i)   the relevant associate entity is an * outward investing entity (non - ADI), an * inward investment vehicle (general), or an * inward investment vehicle (financial), for the relevant period;

  (ii)   the relevant associate entity is an * inward investor (general) or an * inward investor (financial) for the relevant period, and it carries on its * business in Australia at or through one or more of its * Australian permanent establishments throughout the relevant period;

  (b)   both of the following apply to the relevant associate entity:

  (i)   the total * debt deductions of the relevant associate entity and all its associate entities for the income year are more than $250,000;

  (ii)   the result of applying the formula in section   820 - 37 to the relevant associate entity for the income year is less than 0.9;

  (c)   the relevant associate entity is not an * exempt entity for the income year.

Note:   Paragraph   ( b) corresponds to the threshold tests for this Division set out in sections   820 - 35 and 820 - 37.

  (3)   The relevant entity's associate entity debt at a particular time during the relevant period is the total value of all the * debt interests held by the relevant entity at that time that satisfy all of the following:

  (a)   the interests are * on issue at that time;

  (b)   each of the interests was * issued by a relevant associate entity;

  (c)   each of the interests gives rise to costs:

  (i)   that are * debt deductions, for an income year, of the relevant associate entity that issued the interest; and

  (ii)   to the extent that the costs are not amounts mentioned in paragraph 820 - 40(2)(c) and are costs ordinarily payable to an entity other than the relevant entity--that are assessable income of the relevant entity for an income year;

  (d)   the terms and conditions for each of the interests are those that would apply if the relevant entity and the relevant associate entity that issued the interest were dealing at arm's length with each other.

  (4)   For the purposes of subsection   ( 3), take into account the value of a * debt interest issued by a * foreign entity only to the extent that the interest is attributable to any of the following assets that are held by the foreign entity throughout the relevant period:

  (a)   assets that are attributable to the foreign entity's * Australian permanent establishments;

  (b)   other assets held by the foreign entity for the purposes of producing the foreign entity's assessable income.

30   Section   820 - 915

Repeal the section, substitute:

820 - 915   Associate entity equity

  (1)   This section applies to an entity (the relevant entity ) that is an * outward investing entity (non - ADI) or an * inward investing entity (non - ADI) for a period (the relevant period ) that is all or a part of an income year.

  (2)   This section also applies, for the relevant entity, to each entity ( relevant associate entity ) that is an * associate entity of the relevant entity and that is:

  (a)   an * Australian entity; or

  (b)   a * foreign entity that, throughout the relevant period, holds any of the following assets:

  (i)   assets that are attributable to the foreign entity's * Australian permanent establishments;

  (ii)   other assets that are held for the purposes of producing the foreign entity's assessable income.

  (3)   The relevant entity's associate entity equity at a particular time during the relevant period is the total value of:

  (a)   all the * equity interests that the entity holds, at that time, in relevant associate entities; and

  (b)   all the * debt interests * on issue and held by the relevant entity at that time that satisfy all of the following:

  (i)   the interests were * issued by relevant associate entities;

  (ii)   neither the value of each of the interests, nor any part of that value, is all or a part of any * cost - free debt capital of the issuer of the interest at that time;

  (iii)   none of the interests gives rise to any cost, at any time, that is covered by paragraph 820 - 40(1)(a); and

  (c)   all the debt interests on issue and held by the relevant entity at that time that satisfy both of the following:

  (i)   the interests were issued by relevant associate entities;

  (ii)   each of the interests gives rise to a cost, at any time, that is covered by paragraph 820 - 40(1)(a), but the cost is not deductible from the assessable income of the issuer of the interest for any income year.

  (4)   For the purposes of subsection   ( 3), take into account the value of an * equity interest in, or a * debt interest issued by, a * foreign entity only to the extent that the interest is attributable to assets covered by subparagraph   ( 2)(b)(i) or (ii) that are held by the foreign entity throughout the relevant period.

31   Subsection 820 - 920(1)

After "applies to an entity", insert "(the relevant entity )".

32   Subsection 820 - 920(2)

Omit "The entity's associate entity excess amount ", substitute "The relevant entity's associate entity excess amount ".

33   Subsection 820 - 920(2) (step 1 of the method statement)

Repeal the step, substitute:

34   Subsection 820 - 920(3) (method statement)

Repeal the method statement, substitute:

35   Subsection 820 - 920(4) (steps 3 and 4 of the method statement)

Repeal the steps, substitute:

36   At the end of section   820 - 920

Add:

  (5)   For the purposes of the method statement in subsection   ( 4), this subsection covers a * debt interest at a particular time if the interest satisfies all of the following:

  (a)   the interest is * on issue at that time;

  (b)   neither the value of the interest, nor any part of that value, is all or a part of any * cost - free debt capital of the issuer of the interest at that time;

  (c)   the interest does not give rise to any cost, at any time, that is covered by paragraph 820 - 40(1)(a).

  (6)   For the purposes of the method statement in subsection   ( 4), this subsection covers a * debt interest at a particular time if the interest satisfies both of the following:

  (a)   the interest is * on issue at that time;

  (b)   the interest gives rise to a cost, at any time, that is covered by paragraph 820 - 40(1)(a), but the cost is not deductible from the assessable income of the issuer of the interest for any income year.

37   After section   820 - 942

Insert:

Subdivision   820 - KA -- Cost - free debt capital

Guide to Subdivision   820 - KA

820 - 945   What this Subdivision is about

This Subdivision sets out the meaning of cost - free debt capital for the purposes of this Division.

Table of sections

820 - 946   What is cost - free debt capital ?

[This is the end of the Guide.]

820 - 946   What is cost - free debt capital ?

  (1)   This subsection applies to an entity for a period that is all or a part of an income year if the entity satisfies all of the following:

  (a)   the entity is an * outward investing entity (non - ADI) or * inward investing entity (non - ADI) for that period;

  (b)   if the entity is a * foreign entity--the entity holds any of the following assets throughout that period:

  (i)   assets that are attributable to the entity's * Australian permanent establishments;

  (ii)   other assets that are held for the purposes of producing the entity's assessable income;

  (c)   both of the following apply to the entity:

  (i)   the total * debt deductions of the entity and all its * associate entities for the income year are more than $250,000;

  (ii)   the result of applying the formula in section   820 - 37 to the entity for the income year is less than 0.9;

  (d)   the entity is not an * exempt entity for the income year.

Note:   Paragraph   ( c) corresponds to the threshold tests for this Division set out in sections   820 - 35 and 820 - 37.

  (2)   If subsection   ( 1) applies to an entity for a period (the relevant period ), the cost - free debt capital of the entity at a particular time during the relevant period is the total value of all the * debt interests * issued by the entity that satisfy all of the following:

  (a)   the interests are * on issue at that time;

  (b)   none of the interests gives rise to any cost, at any time, that is covered by paragraph 820 - 40(1)(a);

  (c)   each of the interests is covered by subsection   ( 3) or (4) of this section at that time.

  (3)   This subsection covers a * debt interest held by an entity (the holder ) at that time if:

  (a)   subsection   ( 1) also applies to the holder for a period (the overlapped period ) that is, or includes, all or a part of the relevant period; and

  (b)   for the purposes of applying this Division to both the holder and the issuer of the interest (the issuer ), and in relation to only that part of the overlapped period that falls within the relevant period, either or both of the following apply:

  (i)   the * valuation days used to calculate the average value of the holder's assets are different from the valuation days used to calculate the issuer's * adjusted average debt;

  (ii)   the number of valuation days used to calculate the average value of the holder's assets are different from the number of valuation days used to calculate the issuer's adjusted average debt.

  (4)   This subsection covers a * debt interest held by an entity (the holder ) at the particular time mentioned in subsection   ( 2) if:

  (a)   subsection   ( 1) does not apply to the holder for a period that is, or includes, all or a part of the relevant period; and

  (b)   at that time, the debt interest has been * on issue for a period of less than 180 days.

  (5)   For the purposes of subsection   ( 2), take into account the value of a * debt interest issued by a * foreign entity only to the extent that the interest is attributable to assets covered by subparagraph   ( 1)(b)(i) or (ii) that are held by the foreign entity throughout the relevant period.

38   At the end of section   820 - 980 (before the note)

Add:

  (3)   The entity must prepare the records before the time by which the entity must lodge its * income tax return for the income year in relation to all or a part of which the amount is worked out.

39   Section   995 - 1 (definition of controlled foreign entity debt )

Repeal the definition, substitute:

"controlled foreign entity debt" has the meaning given by section   820 - 885.

40   Section   995 - 1 (definition of controlled foreign entity equity )

Repeal the definition, substitute:

"controlled foreign entity equity" has the meaning given by section   820 - 890.

41   Section   995 - 1

Insert:

"cost-free debt capital" has the meaning given by section   820 - 946.

42   Section   995 - 1 ( subparagraph   ( c)(i) of the definition of financial entity )

Omit "financial products", insert "at least one of the financial products".

Income Tax Assessment Act 1936

43   Subsection 160AF(8) ( paragraph   ( c) of the definition of net foreign income )

Omit "that are not", substitute "and".

44   Paragraph 262A(3)(d)

Omit " subsection   ( 2)", substitute " subsections   ( 2) and (3)".

Income Tax (Transitional Provisions) Act 1997

45   At the end of subsection 820 - 40(1)

Add:

  ; and (d)   the arrangement giving rise to the interest is not an arrangement covered by paragraphs   ( a), (b), (c) and (d) of subsection 974 - 75(4) of the Income Tax Assessment Act 1997 before that subsection ceases to have effect on 1   January 2003 (as provided by that subsection).

Part   2 -- Application of amendments

46   Application--amendments of the Income Tax Assessment Act 1997 and the Income Tax (Transitional Provisions) Act 1997

The amendments of the Income Tax Assessment Act 1997 and the Income Tax (Transitional Provisions) Act 1997 made by this Schedule apply in relation to an income year that begins on or after 1   July 2001.

47   Application--amendment of section   160AF of the Income Tax Assessment Act 1936

The amendment of section   160AF of the Income Tax Assessment Act 1936 made by this Schedule applies in relation to assessable income of a year of income that begins on or after 1   July 2001.

48   Application--amendment of section   262A of the Income Tax Assessment Act 1936

The amendment of section   262A of the Income Tax Assessment Act 1936 made by this Schedule applies in relation to a year of income that begins on or after 1   July 2001.