Income Tax Assessment Act 1997 Act No. 38 of 1997 as amended This compilation was prepared on 1 October 2009 taking into account amendments up to Act No. 88 of 2009 Volume 8 includes: Table of Contents Sections 768-100 to 995-1 The text of any of those amendments not in force on that date is appended in the Notes section The operation of amendments that have been incorporated may be affected by application provisions that are set out in the Notes section Contents Chapter 4-International aspects of income tax 1 Part 4-5-General 1 Division 768-Exempt foreign income and gains 1 Subdivision 768-B-Some items of income that are exempt from income tax 1 768-100 Foreign government officials in Australia 1 768-105 Compensation arising out of Second World War 3 Subdivision 768-G-Reduction in capital gains and losses arising from CGT events in relation to certain voting interests in active foreign companies 5 Guide to Subdivision 768-G 5 768-500 What this Subdivision is about 5 Operative provisions 6 768-505 Reducing a capital gain or loss from certain CGT events in relation to certain voting interests 6 Active foreign business asset percentage 7 768-510 Active foreign business asset percentage 7 768-515 Choices to apply market value method or book value method 8 768-520 Market value method-choice made under subsection 768- 515(1) 8 768-525 Book value method-choice made under subsection 768- 515(2) 10 768-530 Active foreign business asset percentage- modifications for foreign life insurance companies and foreign general insurance companies 14 768-533 Foreign company that is a FIF using CFC calculation method-treatment as AFI subsidiary under this Subdivision 16 768-535 Modified rules for foreign wholly-owned groups 17 Types of assets of a foreign company 19 768-540 Active foreign business assets of a foreign company 19 768-545 Assets included in the total assets of a foreign company 21 Voting percentages in a company 22 768-550 Direct voting percentage in a company 22 768-555 Indirect voting percentage in a company 23 768-560 Total voting percentage in a company 23 Subdivision 768-R-Temporary residents 23 Guide to Subdivision 768-R 23 768-900 What this Subdivision is about 23 Operative provisions 25 768-905 Objects 25 768-910 Income derived by temporary resident 25 768-915 Certain capital gains and capital losses of temporary resident to be disregarded 27 768-920 Capital gains and losses on employee shares and rights where taxation of discount not deferred 27 768-925 Notional gain or loss 30 768-930 Adjustment to notional gain or loss 31 768-935 Adjustment for share or right acquired under employee share scheme 32 768-940 Adjustment for derived share 34 768-945 Amending assessment to take account of effect on capital gain or loss of recalculating discount 36 768-950 Individual becoming an Australian resident 37 768-955 Temporary resident who ceases to be temporary resident but remains an Australian resident 37 768-960 Temporary resident not attributable taxpayer for purposes of controlled foreign companies rules 38 768-965 Exemption of temporary resident from taxation in respect of foreign investment fund income 38 768-970 Modification of rules for accruals system of taxation of certain non-resident trust estates 38 768-975 Calculation of beneficiary's share of net income of non-resident trust estate 38 768-980 Interest paid by temporary resident 38 Division 770-Foreign income tax offsets 40 Guide to Division 770 40 770-1 What this Division is about 40 770-5 Object 40 Subdivision 770-A-Entitlement rules for foreign income tax offsets 41 Basic entitlement rule for foreign income tax offset 41 770-10 Entitlement to foreign income tax offset 41 770-15 Meaning of foreign income tax, credit absorption tax and unitary tax 42 Subdivision 770-B-Amount of foreign income tax offset 44 Guide to Subdivision 770-B 44 770-65 What this Subdivision is about 44 Operative provisions 44 770-70 Amount of foreign income tax offset 44 770-75 Foreign income tax offset limit 45 770-80 Increase in offset limit for tax paid on amounts to which section 23AI or 23AK of the Income Tax Assessment Act 1936 apply 46 Subdivision 770-C-Rules about payment of foreign income tax 46 Rules about when foreign tax is paid 46 770-130 When foreign income tax is considered paid-taxes paid by someone else 46 770-135 Foreign income tax paid by CFCs and FIFs on attributed amounts 47 Rules about when foreign tax is considered not paid 51 770-140 When foreign income tax is considered not paid-anti- avoidance rule 51 Subdivision 770-D-Administration 51 770-190 Amendment of assessments 51 Division 775-Foreign currency gains and losses 52 Guide to Division 775 52 775-5 What this Division is about 52 Subdivision 775-A-Objects of this Division 53 775-10 Objects of this Division 53 Subdivision 775-B-Realisation of forex gains or losses 54 775-15 Forex realisation gains are assessable 55 775-20 Certain forex realisation gains are exempt income 57 775-25 Certain forex realisation gains are non-assessable non-exempt income 57 775-30 Forex realisation losses are deductible 57 775-35 Certain forex realisation losses are disregarded 59 775-40 Disposal of foreign currency or right to receive foreign currency-forex realisation event 1 59 775-45 Ceasing to have a right to receive foreign currency- forex realisation event 2 61 775-50 Ceasing to have an obligation to receive foreign currency-forex realisation event 3 64 775-55 Ceasing to have an obligation to pay foreign currency-forex realisation event 4 66 775-60 Ceasing to have a right to pay foreign currency- forex realisation event 5 72 775-65 Only one forex realisation event to be counted 74 775-70 Tax consequences of certain short-term forex realisation gains 76 775-75 Tax consequences of certain short-term forex realisation losses 81 775-80 You may choose not to have sections 775-70 and 775- 75 apply to you 84 775-85 Forex cost base of a right to receive foreign currency 85 775-90 Forex entitlement base of a right to pay foreign currency 85 775-95 Proceeds of assuming an obligation to pay foreign currency 86 775-100 Net costs of assuming an obligation to receive foreign currency 87 775-105 Currency exchange rate effect 88 775-110 Constructive receipts and payments 88 775-115 Economic set-off to be treated as legal set-off 89 775-120 Non-arm's length transactions 89 775-125 CGT consequences of the acquisition of foreign currency as a result of forex realisation event 2 or 3 89 775-130 Certain deductions not allowable 90 775-135 Right to receive or pay foreign currency 90 775-140 Obligation to pay or receive foreign currency 91 775-145 Application of forex realisation events to currency and fungible rights and obligations 91 775-150 Transitional election 92 775-155 Applicable commencement date 92 775-160 Exception-event happens before the applicable commencement date 93 775-165 Exception-currency or right acquired, or obligation incurred, before the applicable commencement date 93 775-175 Application to things happening before commencement 95 Subdivision 775-C-Roll-over relief for facility agreements 96 Guide to Subdivision 775-C 96 775-180 What this Subdivision is about 96 Operative provisions 97 775-185 What is a facility agreement? 97 775-190 What is an eligible security? 97 775-195 You may choose roll-over relief for a facility agreement 98 775-200 Forex realisation event 4 does not apply 99 775-205 What is a roll-over? 99 775-210 Notional loan 100 775-215 Discharge of obligation to pay the principal amount of a notional loan under a facility agreement-forex realisation event 6 104 775-220 Material variation of a facility agreement-forex realisation event 7 106 Subdivision 775-D-Qualifying forex accounts that pass the limited balance test 108 Guide to Subdivision 775-D 108 775-225 What this Subdivision is about 108 Operative provisions 109 775-230 Election to have this Subdivision apply to one or more qualifying forex accounts 109 775-235 Variation of election 110 775-240 Withdrawal of election 110 775-245 When does a qualifying forex account pass the limited balance test? 111 775-250 Tax consequences of passing the limited balance test 114 775-255 Notional realisation when qualifying forex account starts to pass the limited balance test 115 775-260 Modification of tax recognition time 116 Subdivision 775-E-Retranslation for qualifying forex accounts 117 Guide to Subdivision 775-E 117 775-265 What this Subdivision is about 117 Operative provisions 117 775-270 You may choose retranslation for a qualifying forex account 117 775-275 Withdrawal of choice 118 775-280 Tax consequences of choosing retranslation for an account 118 775-285 Retranslation of gains and losses relating to a qualifying forex account-forex realisation event 8 119 Subdivision 775-F-Retranslation under foreign exchange retranslation election under Subdivision 230-D 122 Guide to Subdivision 775-F 122 775-290 What this Subdivision is about 122 775-295 When this Subdivision applies 122 775-300 Tax consequences of choosing retranslation for arrangement 123 775-305 Retranslation of gains and losses relating to arrangement to which foreign exchange retranslation election applies-forex realisation event 9 124 775-310 When election ceases to apply to arrangement 125 775-315 Balancing adjustment when election ceases to apply to arrangement 125 Division 802-Foreign residents' income with an underlying foreign source 127 Subdivision 802-A-Conduit foreign income 127 Guide to Subdivision 802-A 127 802-5 What this Subdivision is about 127 Operative provisions 128 802-10 Objects 128 802-15 Foreign residents-exempting CFI from Australian tax 128 802-17 Trust estates and foreign resident beneficiaries- exempting CFI from Australian tax 129 802-20 Distributions between Australian corporate tax entities-non-assessable non-exempt income 130 802-25 Conduit foreign income of an Australian corporate tax entity 131 802-30 Foreign source income amounts 132 802-35 Capital gains and losses 133 802-40 Effect of foreign income tax offset on conduit foreign income 134 802-45 Previous declarations of conduit foreign income 134 802-50 Receipt of an unfranked distribution from another Australian corporate tax entity 135 802-55 No double benefits 135 802-60 No streaming of distributions 135 Division 820-Thin capitalisation rules 137 Guide to Division 820 138 820-1 What this Division is about 138 820-5 Does this Division apply to an entity? 139 820-10 Map of Division 140 Subdivision 820-A-Preliminary 141 820-30 Object of Division 142 820-32 Exemption for private or domestic assets and non- debt liabilities 142 820-35 Application-$250,000 threshold 142 820-37 Application-assets threshold 142 820-39 Exemption of certain special purpose entities 144 820-40 Meaning of debt deduction 145 Subdivision 820-B-Thin capitalisation rules for outward investing entities (non-ADI) 147 Guide to Subdivision 820-B 147 820-65 What this Subdivision is about 147 Operative provisions 148 820-85 Thin capitalisation rule for outward investing entities (non-ADI) 148 820-90 Maximum allowable debt 151 820-95 Safe harbour debt amount-outward investor (general) 152 820-100 Safe harbour debt amount-outward investor (financial) 153 820-105 Arm's length debt amount 157 820-110 Worldwide gearing debt amount 160 820-115 Amount of debt deduction disallowed 162 820-120 Application to part year periods 162 Subdivision 820-C-Thin capitalisation rules for inward investing entities (non-ADI) 164 Guide to Subdivision 820-C 164 820-180 What this Subdivision is about 164 Operative provisions 165 820-185 Thin capitalisation rule for inward investing entities (non-ADI) 165 820-190 Maximum allowable debt 168 820-195 Safe harbour debt amount-inward investment vehicle (general) 168 820-200 Safe harbour debt amount-inward investment vehicle (financial) 169 820-205 Safe harbour debt amount-inward investor (general) 172 820-210 Safe harbour debt amount-inward investor (financial) 173 820-215 Arm's length debt amount 176 820-220 Amount of debt deduction disallowed 180 820-225 Application to part year periods 180 Subdivision 820-D-Thin capitalisation rules for outward investing entities (ADI) 182 Guide to Subdivision 820-D 182 820-295 What this Subdivision is about 182 Operative provisions 183 820-300 Thin capitalisation rule for outward investing entities (ADI) 183 820-305 Minimum capital amount 185 820-310 Safe harbour capital amount 185 820-315 Arm's length capital amount 186 820-320 Worldwide capital amount 188 820-325 Amount of debt deduction disallowed 190 820-330 Application to part year periods 191 Subdivision 820-E-Thin capitalisation rules for inward investing entities (ADI) 192 Guide to Subdivision 820-E 192 820-390 What this Subdivision is about 192 Operative provisions 193 820-395 Thin capitalisation rule for inward investing entities (ADI) 193 820-400 Minimum capital amount 194 820-405 Safe harbour capital amount 195 820-410 Arm's length capital amount 195 820-415 Amount of debt deduction disallowed 197 820-420 Application to part year periods 198 Subdivision 820-EA-Some financial entities may choose to be treated as ADIs 200 820-430 When choice can be made, and what effect it has 200 820-435 Conditions 201 820-440 Revocation of choice 203 820-445 How this Subdivision interacts with Subdivision 820- FA 203 Subdivision 820-FA-How the thin capitalisation rules apply to consolidated groups and MEC groups 204 Guide to Subdivision 820-FA 204 820-579 What this Subdivision is about 204 Operative provisions 205 820-581 How this Division applies to head company for income year in which group comes into existence or ceases to exist 205 820-583 Classification of head company 206 820-584 Exempt special purpose entities treated as not being member of group 208 820-585 Exemption for consolidated group headed by foreign- controlled Australian ADI or its holding company 208 820-587 Additional application of Subdivision 820-D to MEC group that includes foreign-controlled Australian ADI 209 820-588 Choice to treat specialist credit card institutions as being financial entities and not ADIs 210 820-589 How Subdivision 820-D applies to a MEC group 211 Subdivision 820-FB-Grouping branches of foreign banks and foreign financial entities with a consolidated group, MEC group or single Australian resident company 212 Guide to Subdivision 820-FB 212 820-595 What this Subdivision is about 212 Choice to group with branches of foreign banks and foreign financial entities 213 820-597 Choice by head company of consolidated group or MEC group 213 820-599 Choice by Australian resident company outside consolidatable group and MEC group 214 Effect of choice 215 820-601 Application 215 820-603 General 215 820-605 Effect on establishment entity if certain debt deductions disallowed 217 820-607 Effect on test periods under this Division 218 820-609 Effect on classification of head company or single company 218 820-610 Choice not to be outward investing entity (ADI) or inward investing entity (ADI) 220 820-611 Values to be based on what would be in consolidated accounts for group 221 820-613 How Subdivision 820-D applies 222 820-615 How Subdivision 820-E applies 223 Subdivision 820-G-Calculating the average values 224 Guide to Subdivision 820-G 224 820-625 What this Subdivision is about 224 How to calculate the average values 225 820-630 Methods of calculating average values 225 820-635 The opening and closing balances method 226 820-640 The 3 measurement days method 227 820-645 The frequent measurement method 228 Special rules about values and valuation 231 820-675 Amount to be expressed in Australian currency 231 820-680 Valuation of assets, liabilities and equity capital 231 820-682 Recognition of assets and liabilities-modifying application of accounting standards 234 820-683 Recognition of internally generated intangible items- modifying application of accounting standards 235 820-684 Valuation of intangible assets if no active market- modifying application of accounting standards 236 820-685 Valuation of debt capital 238 820-690 Commissioner's power 238 Subdivision 820-H-Control of entities 238 Guide to Subdivision 820-H 238 820-740 What this Subdivision is about 238 Australian controller of a foreign entity 240 820-745 What is an Australian controlled foreign entity? 240 820-750 What is an Australian controller of a controlled foreign company? 240 820-755 What is an Australian controller of a controlled foreign trust? 240 820-760 What is an Australian controller of a controlled foreign corporate limited partnership? 241 Foreign controlled Australian entity 241 820-780 What is a foreign controlled Australian entity? 241 820-785 What is a foreign controlled Australian company? 242 820-790 What is a foreign controlled Australian trust? 243 820-795 What is a foreign controlled Australian partnership? 245 Thin capitalisation control interest 247 820-815 General rule about thin capitalisation control interest in a company, trust or partnership 247 820-820 Special rules about calculating TC control interest held by an entity 247 820-825 Special rules about calculating TC control interests held by a group of entities 248 820-830 Special rules about determining percentage of TC control interest 249 820-835 Commissioner's power 250 TC direct control interest, TC indirect control interest and TC control tracing interest 250 820-855 TC direct control interest in a company 250 820-860 TC direct control interest in a trust 251 820-865 TC direct control interest in a partnership 252 820-870 TC indirect control interest in a company, trust or partnership 253 820-875 TC control tracing interest in a company, trust or partnership 256 Subdivision 820-HA-Controlled foreign entity debt and controlled foreign entity equity 257 Guide to Subdivision 820-HA 257 820-880 What this Subdivision is about 257 820-881 Application 257 820-885 What is controlled foreign entity debt? 257 820-890 What is controlled foreign entity equity? 258 Subdivision 820-I-Associate entities 259 Guide to Subdivision 820-I 259 820-900 What this Subdivision is about 259 820-905 Associate entity 259 820-910 Associate entity debt 263 820-915 Associate entity equity 265 820-920 Associate entity excess amount 266 Subdivision 820-J-Equity interest in a trust or partnership 271 Guide to Subdivision 820-J 271 820-925 What this Subdivision is about 271 820-930 Equity interest in a trust or partnership 271 Subdivision 820-K-Zero-capital amount 275 Guide to Subdivision 820-K 275 820-940 What this Subdivision is about 275 820-942 How to work out the zero-capital amount 275 Subdivision 820-KA-Cost-free debt capital and excluded equity interests 279 Guide to Subdivision 820-KA 279 820-945 What this Subdivision is about 279 820-946 Cost-free debt capital and excluded equity interest 280 Subdivision 820-L-Record keeping requirements 282 Guide to Subdivision 820-L 282 820-950 What this Subdivision is about 282 Records about Australian permanent establishments 283 820-960 Records about Australian permanent establishments 283 820-965 Review of Commissioner's decision 286 Records about arm's length amounts 286 820-980 Records about arm's length debt amount and arm's length capital amount 286 Records about asset revaluations 287 820-985 Methodology of revaluation and independence of valuer 287 Offences committed by certain entities 288 820-990 Offences-treatment of partnerships 288 820-995 Offences-treatment of unincorporated companies 289 Division 830-Foreign hybrids 291 Guide to Division 830 291 830-1 What this Division is about 291 Subdivision 830-A-Meaning of "foreign hybrid" 291 830-5 Foreign hybrid 292 830-10 Foreign hybrid limited partnership 292 830-15 Foreign hybrid company 293 Subdivision 830-B-Extension of normal partnership provisions to foreign hybrid companies 294 830-20 Treatment of company as a partnership 295 830-25 Partners are the shareholders in the company 295 830-30 Individual interest of a partner in net income etc. equals percentage of notional distribution of company's profits 295 830-35 Partner's interest in assets 295 830-40 Control and disposal of share in partnership income 296 Subdivision 830-C-Special rules applicable while an entity is a foreign hybrid 296 830-45 Partner's revenue and net capital losses from foreign hybrid not to exceed partner's loss exposure amount 296 830-50 Deduction etc. where partner's foreign hybrid revenue loss amount and foreign hybrid net capital loss amount are less than partner's loss exposure amount 297 830-55 Meaning of foreign hybrid net capital loss amount 299 830-60 Meaning of loss exposure amount 299 830-65 Meaning of outstanding foreign hybrid revenue loss amount 301 830-70 Meaning of outstanding foreign hybrid net capital loss amount 301 830-75 Extended meaning of subject to tax 302 Subdivision 830-D-Special rules applicable when an entity becomes or ceases to be a foreign hybrid 304 830-80 Setting the tax cost of partners' interests in the assets of an entity that becomes a foreign hybrid 305 830-85 Setting the tax cost of assets of an entity when it ceases to be a foreign hybrid 305 830-90 What the expression tax cost is set means 305 830-95 What the expression tax cost setting amount means 307 830-100 What the expression tax cost means 310 830-105 What the expression asset-based income tax regime means 311 830-110 No disposal of assets etc. on entity becoming or ceasing to be a foreign hybrid 311 830-115 Tax losses cannot be transferred to a foreign hybrid 311 830-120 End of CFC's last statutory accounting period 312 830-125 How long interest in asset, or asset, held 312 Division 840-Withholding taxes 314 Guide to Division 840 314 840-1 What this Division is about 314 Subdivision 840-M-Managed investment trust withholding tax 314 Guide to Subdivision 840-M 314 840-800 What this Subdivision is about 314 Operative provisions 315 840-805 Liability for managed investment trust withholding tax 315 840-810 When managed investment trust withholding tax is payable 317 840-815 Certain income is non-assessable non-exempt income 318 840-820 Agency rules 318 Division 842-Exempt Australian source income and gains of foreign residents 319 Subdivision 842-B-Some items of Australian source income of foreign residents that are exempt from income tax 319 Guide to Subdivision 842-B 319 842-100 What this Subdivision is about 319 842-105 Amounts of Australian source ordinary income and statutory income that are exempt 319 Division 855-Capital gains and foreign residents 323 Guide to Division 855 323 855-1 What this Division is about 323 Subdivision 855-A-Disregarding a capital gain or loss by foreign residents 323 855-5 Objects of this Subdivision 324 855-10 Disregarding a capital gain or loss from CGT events 324 855-15 When an asset is taxable Australian property 325 855-20 Taxable Australian real property 325 855-25 Indirect Australian real property interests 326 855-30 Principal asset test 327 855-35 Reducing a capital gain or loss from a business asset-Australian permanent establishments 329 855-40 Capital gains and losses of foreign residents through fixed trusts 329 Subdivision 855-B-Becoming an Australian resident 331 855-45 Individual or company becomes an Australian resident 331 855-50 Trust becomes a resident trust 331 855-55 CFC becomes an Australian resident 332 Chapter 5-Administration 334 Part 5-30-Record-keeping and other obligations 334 Division 900-Substantiation rules 334 Guide to Division 900 334 900-1 What this Division is about 334 Subdivision 900-A-Application of Division 334 900-5 Application of the requirements of Division 900 335 900-10 Substantiation requirement 335 900-12 Application to recipients and payers of certain withholding payments 335 Subdivision 900-B-Substantiating work expenses 336 900-15 Getting written evidence 337 900-20 Keeping travel records 337 900-25 Retaining the written evidence and travel records 338 900-30 Meaning of work expense 338 900-35 Exception for small total of expenses 340 900-40 Exception for laundry expenses below a certain limit 340 900-45 Exception for work expense related to award transport payment 341 900-50 Exception for domestic travel allowance expenses 341 900-55 Exception for overseas travel allowance expenses 342 900-60 Exception for reasonable overtime meal allowance 342 900-65 Crew members on international flights need not keep travel records 342 Subdivision 900-C-Substantiating car expenses 343 900-70 Getting written evidence 343 900-75 Retaining the written evidence and odometer records 343 Subdivision 900-D-Substantiating business travel expenses 344 900-80 Getting written evidence 344 900-85 Keeping travel records 345 900-90 Retaining the written evidence and travel records 345 900-95 Meaning of business travel expense 346 Subdivision 900-E-Written evidence 347 Guide to Subdivision 900-E 347 900-100 What this Subdivision is about 347 Operative provisions 347 900-105 Ways of getting written evidence 347 900-110 Time limits 347 900-115 Written evidence from supplier 348 900-120 Written evidence of depreciating asset expense 348 900-125 Evidence of small expenses 349 900-130 Evidence of expenses considered otherwise too hard to substantiate 350 900-135 Evidence on a payment summary 350 Subdivision 900-F-Travel records 351 Guide to Subdivision 900-F 351 900-140 What this Subdivision is about 351 900-145 Purpose of a travel record 351 Operative provisions 351 900-150 Recording activities in travel records 351 900-155 Showing which of your activities were income- producing activities 352 Subdivision 900-G-Retaining and producing records 352 Guide to Subdivision 900-G 352 900-160 What this Subdivision is about 352 900-165 The retention period 352 Operative provisions 353 900-170 Extending the retention period if an expense is disputed 353 900-175 Commissioner may tell you to produce your records 353 900-180 How to comply with a notice 353 900-185 What happens if you don't comply 354 Subdivision 900-H-Relief from effects of failing to substantiate 354 900-195 Commissioner's discretion to review failure to substantiate 354 900-200 Reasonable expectation that substantiation would not be required 354 900-205 What if your documents are lost or destroyed? 355 Subdivision 900-I-Award transport payments 355 Guide to Subdivision 900-I 355 900-210 What this Subdivision is about 355 Operative provisions 356 900-215 Deducting an expense related to an award transport payment 356 900-220 Definition of award transport payment 357 900-225 Substituted industrial instruments 358 900-230 Changes to industrial instruments applied for before 29 October 1986 358 900-235 Changes to industrial instruments solely referable to matters in the instrument 358 900-240 Deducting in anticipation of receiving award transport payment 358 900-245 Effect of exception in this Subdivision on exception for small total of expenses 359 900-250 Effect of exception in this Subdivision on methods of calculating car expense deductions 359 Part 5-35-Miscellaneous 361 Division 905-Offences 361 905-5 Application of the Criminal Code 361 Division 909-Regulations 362 909-1 Regulations 362 Chapter 6-The Dictionary 363 Part 6-1-Concepts and topics 363 Division 950-Rules for interpreting this Act 363 950-100 What forms part of this Act 363 950-105 What does not form part of this Act 363 950-150 Guides, and their role in interpreting this Act 364 Division 960-General 365 Subdivision 960-C-Foreign currency 365 960-49 Objects of this Subdivision 365 960-50 Translation of amounts into Australian currency 365 960-55 Application of translation rules 371 Subdivision 960-D-Functional currency 372 Guide to Subdivision 960-D 372 960-56 What this Subdivision is about 372 Operative provisions 373 960-59 Object of this Subdivision 373 960-60 You may choose a functional currency 374 960-61 Functional currency for calculating capital gains and losses on indirect Australian real property interests 376 960-65 Backdated startup choice 377 960-70 What is the applicable functional currency? 381 960-75 What is a transferor trust? 382 960-80 Translation rules 383 960-85 Special rule about translation-events that happened before the current choice took effect 389 960-90 Withdrawal of choice 391 Subdivision 960-E-Entities 394 960-100 Entities 394 960-105 Certain entities treated as agents 395 Subdivision 960-F-Distribution by corporate tax entities 395 960-115 Meaning of corporate tax entity 395 960-120 Meaning of distribution 396 Subdivision 960-G-Membership of entities 397 960-130 Members of entities 397 960-135 Membership interest in an entity 398 960-140 Ordinary membership interest 398 Subdivision 960-GP-Participation interests in entities 398 960-180 Total participation interest 398 960-185 Indirect participation interest 399 960-190 Direct participation interest 399 960-195 Non-portfolio interest test 401 Subdivision 960-H-Abnormal trading in shares or units 401 960-220 Meaning of trading 401 960-225 Abnormal trading 402 960-230 Abnormal trading-5% of shares or units in one transaction 403 960-235 Abnormal trading-suspected 5% of shares or units in a series of transactions 403 960-240 Abnormal trading-suspected acquisition or merger 403 960-245 Abnormal trading-20% of shares or units traded over 60 day period 403 Subdivision 960-J-Family relationships 404 Guide to Subdivision 960-J 404 960-250 What this Subdivision is about 404 Operative provisions 404 960-252 Object of this Subdivision 404 960-255 Family relationships 405 Subdivision 960-M-Indexation 406 Guide to Subdivision 960-M 406 960-260 What this Subdivision is about 406 960-265 The provisions for which indexation is relevant 406 Operative provisions 407 960-270 Indexing amounts 407 960-275 Indexation factor 408 960-280 Index number 409 960-285 Indexation-superannuation and employment termination 410 Subdivision 960-S-Market value 412 Guide to Subdivision 960-S 412 960-400 What this Subdivision is about 412 Operative provisions 412 960-405 Effect of GST on market value of an asset 412 960-410 Market value of non-cash benefits 413 Division 974-Debt and equity interests 414 Subdivision 974-A-General 414 Guide to Division 974 414 974-1 What this Division is about 414 974-5 Overview of Division 415 Operative provisions 416 974-10 Object 416 Subdivision 974-B-Debt interests 418 974-15 Meaning of debt interest 419 974-20 The test for a debt interest 421 974-25 Exceptions to the debt test 422 974-30 Providing a financial benefit 423 974-35 Valuation of financial benefits-general rules 424 974-40 Valuation of financial benefits-rights and options to terminate early 426 974-45 Valuation of financial benefits-convertible interests 427 974-50 Valuation of financial benefits-value in present value terms 427 974-55 The debt interest and its issue 428 974-60 Debt interest arising out of obligations owed by a number of entities 429 974-65 Commissioner's power 430 Subdivision 974-C-Equity interests in companies 431 974-70 Meaning of equity interest in a company 432 974-75 The test for an equity interest 434 974-80 Equity interest arising from arrangement funding return through connected entities 437 974-85 Right or return contingent on economic performance 439 974-90 Right or return at discretion of company or connected entity 439 974-95 The equity interest 439 Subdivision 974-D-Common provisions 440 974-100 Treatment of convertible and converting interests 440 974-105 Effect of action taken in relation to interest arising from related schemes 441 974-110 Effect of material change 441 974-112 Determinations by Commissioner 444 Subdivision 974-E-Non-share distributions by a company 446 974-115 Meaning of non-share distribution 446 974-120 Meaning of non-share dividend 446 974-125 Meaning of non-share capital return 446 Subdivision 974-F-Related concepts 446 974-130 Financing arrangement 447 974-135 Effectively non-contingent obligation 449 974-140 Ordinary debt interest 450 974-145 Benchmark rate of return 450 974-150 Schemes 451 974-155 Related schemes 452 974-160 Financial benefit 453 974-165 Convertible and converting interests 453 Division 975-Concepts about companies 455 Subdivision 975-A-General 455 975-150 Position to affect rights in relation to a company 455 975-155 When is an entity a controller (for CGT purposes) of a company? 456 975-160 When an entity has an associate-inclusive control interest 456 Subdivision 975-G-What is a company's share capital account? 457 975-300 Meaning of share capital account 457 Subdivision 975-W-Wholly-owned groups of companies 458 975-500 Wholly-owned groups 458 975-505 What is a 100% subsidiary? 458 Division 977-Realisation events, and the gains and losses they realise for income tax purposes 460 CGT assets 460 977-5 Realisation event 460 977-10 Loss realised for income tax purposes 460 977-15 Gain realised for income tax purposes 461 Trading stock 461 977-20 Realisation event 461 977-25 Disposal of trading stock: loss realised for income tax purposes 461 977-30 Ending of an income year: loss realised for income tax purposes 462 977-35 Disposal of trading stock: gain realised for income tax purposes 463 977-40 Ending of an income year: gain realised for income tax purposes 463 Revenue assets 464 977-50 Meaning of revenue asset 464 977-55 Loss or gain realised for income tax purposes 464 Division 976-Imputation 466 976-1 Franked part of a distribution 466 976-5 Unfranked part of a distribution 466 976-10 The part of a distribution that is franked with an exempting credit 466 976-15 The part of a distribution that is franked with a venture capital credit 466 Part 6-5-Dictionary definitions 467 Division 995-Definitions 467 995-1 Definitions [see Notes 2 and 3] 467 Chapter 4-International aspects of income tax Part 4-5-General Division 768-Exempt foreign income and gains Table of Subdivisions 768-B Some items of income that are exempt from income tax 768-G Reduction in capital gains and losses arising from CGT events in relation to certain voting interests in active foreign companies 768-R Temporary residents Subdivision 768-B-Some items of income that are exempt from income tax Table of sections 768-100 Foreign government officials in Australia 768-105 Compensation arising out of Second World War 768-100 Foreign government officials in Australia (1) The amounts of *ordinary income and *statutory income covered by the table are exempt from income tax. In some cases, the exemption is subject to exceptions or special conditions, or both. Note 1: Ordinary and statutory income that is exempt from income tax is called exempt income: see section 6-20. The note to subsection 6-15(2) describes some of the other consequences of it being exempt income. Note 2: Even if an exempt payment is made to you, the Commissioner can still require you to lodge an income tax return or information under section 161 of the Income Tax Assessment Act 1936. |Exempt amounts | |Item|If you are: |the following |subject to these| | | |amounts are |exceptions and | | | |exempt from |special | | | |income tax: |conditions: | |1 |(a) a |(a) your |(a) no | | |representative|official |Convention | | |in Australia |salary; and |listed in | | |of the |(b) your |subsection (2) | | |government of |*ordinary |applies to the | | |a foreign |income, and |representative; | | |country; or |your *statutory|and | | |(b) a member |income, from a |(b) the country | | |of the |source outside |concerned grants| | |official staff|Australia |in relation to | | |of such a | |Australia | | |representative| |exemptions from | | |; | |taxes on income | | |and you are | |that correspond | | |neither an | |with the | | |Australian | |exemption in | | |citizen nor | |this item | | |ordinarily | | | | |resident in | | | | |Australia | | | |2 |(a) an officer|(a) your |that country | | |of the |official |exempts from | | |government of |salary; and |income tax the | | |a |(b) your |salaries of | | |*Commonwealth |*ordinary |officers of the | | |of Nations |income, and |government of | | |country; and |your *statutory|the Commonwealth| | |(b) |income, from a |temporarily in | | |temporarily in|source outside |that country for| | |Australia to |Australia |similar purposes| | |render service| |in accordance | | |on behalf of | |with a similar | | |that country, | |arrangement | | |or an | | | | |*Australian | | | | |government | | | | |agency, in | | | | |accordance | | | | |with an | | | | |*arrangement | | | | |between the | | | | |governments of| | | | |that country | | | | |and of the | | | | |Commonwealth | | | | |or of a State | | | | |or Territory | | | (2) The Conventions are: (a) the Vienna Convention on Diplomatic Relations, as having the force of law because of the Diplomatic Privileges and Immunities Act 1967; (b) the Vienna Convention on Consular Relations, as having the force of law because of the Consular Privileges and Immunities Act 1972. Note: Those Conventions have the force of law in Australia because of those Acts and achieve substantially the same effect as item 1 of the table: see Article 34 of the Vienna Convention on Diplomatic Relations and Article 49 of the Vienna Convention on Consular Relations. 768-105 Compensation arising out of Second World War (1) A payment to you is exempt from income tax if: (a) you are an Australian resident at the time when it would otherwise be included in your assessable income; and (b) the payment is from a source in a foreign country; and (c) the payment is in connection with: (i) any wrong or injury; or (ii) any loss of, or damage to, property; or (iii) any other detriment; suffered by you or another individual as a result of: (iv) persecution by the National Socialist regime of Germany during the National Socialist period; or (v) persecution during the Second World War by any other enemy of the Commonwealth or by a regime covered by subsection (3); or (vi) flight from persecution mentioned in subparagraph (iv) or (v); or (vii) participation in a resistance movement during the Second World War against forces of the National Socialist regime of Germany or against forces of any other enemy of the Commonwealth; and (d) the payment is not directly or indirectly from any of your *associates. Note: An example of a detriment covered by subparagraph (c)(iii) is if you lost the opportunity to qualify for a pension because your period of contribution was cut short because you had to flee persecution by the National Socialist regime. Duration of Second World War (2) Subsection (1) applies to: (a) the period immediately before the Second World War; and (b) the period immediately after the Second World War; in the same way as it applies to the period of the Second World War. Regimes associated with an enemy of the Commonwealth (3) This subsection covers a regime that was: (a) in alliance with; or (b) occupied by; or (c) effectively controlled by; or (d) under duress from; or (e) surrounded by; either or both of the following: (f) the National Socialist regime of Germany; (g) any other enemy of the Commonwealth. Legal personal representative (4) Subsection (1) applies to a payment to: (a) your *legal personal representative; or (b) a trust established by your will; in a corresponding way to the way in which it would have applied if: (c) the payment had been to you; and (d) if the payment is made after your death-you were still alive. Subdivision 768-G-Reduction in capital gains and losses arising from CGT events in relation to certain voting interests in active foreign companies Guide to Subdivision 768-G 768-500 What this Subdivision is about If: (a) a company has a capital gain or capital loss arising from a CGT event that happens in relation to a share in a foreign company; and (b) the company holds a direct voting percentage of 10% or more in the foreign company for a certain period before the CGT event happens; the gain or loss is reduced by a percentage that reflects the degree to which the assets of the foreign company are used in an active business. Table of sections Operative provisions 768-505 Reducing a capital gain or loss from certain CGT events in relation to certain voting interests Active foreign business asset percentage 768-510 Active foreign business asset percentage 768-515 Choices to apply market value method or book value method 768-520 Market value method-choice made under subsection 768- 515(1) 768-525 Book value method-choice made under subsection 768-515(2) 768-530 Active foreign business asset percentage-modifications for foreign life insurance companies and foreign general insurance companies 768-533 Foreign company that is a FIF using CFC calculation method- treatment as AFI subsidiary under this Subdivision 768-535 Modified rules for foreign wholly-owned groups Types of assets of a foreign company 768-540 Active foreign business assets of a foreign company 768-545 Assets included in the total assets of a foreign company Voting percentages in a company 768-550 Direct voting percentage in a company 768-555 Indirect voting percentage in a company 768-560 Total voting percentage in a company Operative provisions 768-505 Reducing a capital gain or loss from certain CGT events in relation to certain voting interests (1) The *capital gain or *capital loss a company (the holding company) that is an Australian resident makes from a *CGT event that happened at a particular time (the time of the CGT event) to a *share in a company (the foreign disposal company) that is a foreign resident is reduced if: (a) the holding company held a *direct voting percentage of 10% or more in the foreign disposal company throughout a 12 month period that: (i) began no earlier than 24 months before the time of the CGT event; and (ii) ended no later than that time; and (b) the share is not: (i) an eligible finance share (within the meaning of Part X of the Income Tax Assessment Act 1936); or (ii) a widely distributed finance share (within the meaning of that Part); and (c) the CGT event is CGT event A1, B1, C2, E1, E2, G3, J1, K4, K6, K10 or K11. (2) The gain or loss is reduced by the *active foreign business asset percentage (see sections 768-510, 768-530 and 768-535) of the foreign disposal company in relation to the holding company at the time of the CGT event. Active foreign business asset percentage 768-510 Active foreign business asset percentage (1) The active foreign business asset percentage of a company (the foreign company) that is a foreign resident, in relation to the holding company mentioned in section 768-505, at the time of the CGT event mentioned in that section, is worked out in accordance with this section. Market value method (2) Work out that percentage under section 768-520 if: (a) the holding company has made a choice under subsection 768- 515(1) in relation to the foreign company for that time; and (b) there is sufficient evidence of the *market value at that time of: (i) all *assets included in the total assets of the foreign company at that time; and (ii) all *active foreign business assets of the foreign company at that time. Book value method (3) Work out that percentage under section 768-525 if: (a) the holding company has made a choice under subsection 768- 515(2) in relation to the foreign company for that time; and (b) there are *recognised company accounts of the foreign company for a period that ends no later than that time, but no more than 12 months before that time; and (c) if the foreign company was in existence before the start of the period mentioned in paragraph (b)-there are recognised company accounts of the foreign company for a period that ends at least 6 months, but no more than 18 months, before the end of the period mentioned in paragraph (b). Default method (4) Otherwise, that percentage is: (a) 100% (if this section is being applied for the purposes of section 768-505 to reduce a *capital loss of the holding company); or (b) zero (in any other case). 768-515 Choices to apply market value method or book value method Choice for market value method (1) The holding company may choose to work out the *active foreign business asset percentage of the foreign company for the time of the CGT event under section 768-520. Choice for book value method (2) The holding company may choose to work out the *active foreign business asset percentage of the foreign company for the time of the CGT event under section 768-525. Method of making choice (3) The way an entity making a choice under subsection (1) or (2) prepares its *income tax return is sufficient evidence of the making of the choice. Note: If an entity does not make a choice under subsection (1) or (2), it will work out the active foreign business asset percentage of the foreign company in accordance with the default method in subsection 768-510(4). 768-520 Market value method-choice made under subsection 768-515(1) (1) The active foreign business asset percentage of the foreign company in relation to the holding company, at the time of the CGT event, is worked out under this section in this way. Method statement Step 1. Work out the *market value at that time of all *assets included in the total assets of the foreign company at that time. Step 2. Work out the *market value (see subsection (2)) at that time of all *active foreign business assets of the foreign company at that time. Step 3. Divide the result of step 2 by the result of step 1. Step 4. Express the result of step 3 as a percentage, and round that percentage to the nearest whole percentage point (rounding a number ending in .5 upwards). Step 5. The active foreign business asset percentage is: (a) if the result of step 4 is less than 10%-zero; or (b) if the result of step 4 is 10% or more, but less than 90%- that result; or (c) if the result of step 4 is 90% or more-100%. Note 1: If the foreign company is a foreign life insurance company or a foreign general insurance company, the result of step 2 is modified under section 768-530. Note 2: If the foreign company is a member of a wholly-owned group, section 768-535 may modify the way in which this section operates. (2) If, at the time of the CGT event: (a) an *active foreign business asset of the foreign company is a *share in another company (the subsidiary company); and (b) the subsidiary company is a foreign resident; then, in working out the *market value of all *active foreign business assets of the foreign company at that time for the purposes of step 2 of the method statement in subsection (1), treat the *market value of the share at that time according to the following table. |Market value of a share in subsidiary company | |Item|If: |treat the market | | | |value of the share | | | |as: | |1 |(a) the foreign |the *share's *market| | |company has a *direct|value at that time, | | |voting percentage of |multiplied by the | | |10% or more in the |*active foreign | | |subsidiary company at|business asset | | |that time; and |percentage of the | | |(b) the holding |subsidiary company | | |company has a *total |in relation to the | | |voting percentage of |holding company at | | |10% or more in the |that time | | |subsidiary company at| | | |that time | | |2 |item 1 does not apply|zero | Note: For the purposes of item 1 of the table, it is necessary to work out the active foreign business asset percentage of the subsidiary company before working out the active foreign business asset percentage of the foreign company. 768-525 Book value method-choice made under subsection 768-515(2) (1) The active foreign business asset percentage of the foreign company in relation to the holding company, at the time of the CGT event, is worked out under this section in this way. Method statement Step 1. Work out the foreign company's average value of total assets at that time under subsection (2). Step 2. Work out the foreign company's average value of active foreign business assets at that time under subsection (3). Step 3. Divide the result of step 2 by the result of step 1. Step 4. Express the result of step 3 as a percentage, and round that percentage to the nearest whole percentage point (rounding a number ending in .5 upwards). Step 5. The active foreign business asset percentage is: (a) if the result of step 4 is less than 10%-zero; or (b) if the result of step 4 is 10% or more, but less than 90%- that result; or (c) if the result of step 4 is 90% or more-100%. Note: If the foreign company is a member of a wholly-owned group, section 768-535 may modify the way in which this section operates. (2) The foreign company's average value of total assets at the time of the CGT event is worked out in this way. Method statement Step 1. Work out the sum of the values (see subsection (5)) of every *asset included in the total assets of the foreign company at the end of the most recent period: (a) that ends no later than that time, but no more than 12 months before that time; and (b) for which the foreign company has *recognised company accounts. Step 2. Work out the sum of the values (see subsection (5)) of every *asset included in the total assets of the foreign company at the end of the most recent period: (a) that ends at least 6 months, but no more than 18 months, before the end of the period mentioned in step 1; and (b) for which the foreign company has *recognised company accounts. Note: See subsection (6) if the foreign company does not have recognised company accounts for a period mentioned in this step. Step 3. Work out the sum of the results of steps 1 and 2, and divide that sum by 2. (3) The foreign company's average value of active foreign business assets at that time is worked out in this way. Method statement Step 1. Work out the sum of the values (see subsections (4) and (5)) of every *active foreign business asset of the foreign company at the end of the most recent period: (a) that ends no later than that time, but no more than 12 months before that time; and (b) for which the foreign company has *recognised company accounts. Step 2. Work out the sum of the values (see subsections (4) and (5)) of every *active foreign business asset of the foreign company at the end of the most recent period: (a) that ends at least 6 months, but no more than 18 months, before the end of the period mentioned in step 1; and (b) for which the foreign company has *recognised company accounts. Note: See subsection (6) if the foreign company does not have recognised company accounts for a period mentioned in this step. Step 3. Work out the sum of the results of steps 1 and 2, and divide that sum by 2. Note: If the foreign company is a foreign life insurance company or a foreign general insurance company, the results of steps 1 and 2 are modified under section 768-530. (4) If an *active foreign business asset of the foreign company is a *share in another company (the subsidiary company) that is a foreign resident, then, for the purposes of steps 1 and 2 of the method statement in subsection (3), treat the value of the share at a particular time according to the following table. |Value of a share in subsidiary company | |Item|If: |treat the value of | | | |the share as: | |1 |(a) the foreign |the *share's value | | |company has a *direct|(see subsection (5))| | |voting percentage of |at that time, | | |10% or more in the |multiplied by the | | |subsidiary company at|*active foreign | | |that time; and |business asset | | |(b) the holding |percentage of the | | |company has a *total |subsidiary company | | |voting percentage of |in relation to the | | |10% or more in the |holding company at | | |subsidiary company at|that time | | |that time | | |2 |item 1 does not apply|zero | Note: For the purposes of item 1 of the table, it is necessary to work out the active foreign business asset percentage of the subsidiary company before working out the active foreign business asset percentage of the foreign company. (5) For the purposes of this section, the value of an asset of a foreign company at the end of a period is taken to be: (a) the value of the asset as shown in the *recognised company accounts of the foreign company for that period; or (b) if the value of the asset is not shown in the recognised company accounts of the foreign company for that period-zero. (6) The result of: (a) step 2 of the method statement in subsection (2); and (b) step 2 of the method statement in subsection (3); is taken to be zero if the foreign company does not have *recognised company accounts for a period mentioned in those steps. Note: This will only be the case if the foreign company was not in existence before the start of the period mentioned in step 1 of those method statements (see paragraph 768- 510(3)(c)). 768-530 Active foreign business asset percentage-modifications for foreign life insurance companies and foreign general insurance companies (1) If the foreign company is a *foreign life insurance company or a *foreign general insurance company, work out its *active foreign business asset percentage according to section 768-510, but with the modifications set out in subsections (2) and (3). (2) Treat a reference in the following provisions to a period as a reference to a *statutory accounting period of the foreign company: (a) paragraphs 768-510(3)(b) and (c); (b) section 768-525. (3) Apply the modifications set out in the following table. |Modifications for foreign life insurance | |companies and foreign general insurance | |companies | |Item|The result |is increased by the amount | | |of this |applicable under | | |step: |subsection (4) for this | | | |statutory accounting period: | |1 |step 2 of |the most recent *statutory | | |the method |accounting period of the | | |statement in|foreign company ending at or | | |subsection |before the time mentioned in | | |768-520(1) |that step | |2 |step 1 of |the *statutory accounting | | |the method |period mentioned in that step| | |statement in|(as modified by | | |subsection |subsection (2) of this | | |768-525(3) |section) | |3 |step 2 of |the *statutory accounting | | |the method |period mentioned in that step| | |statement in|(as modified by | | |subsection |subsection (2) of this | | |768-525(3) |section) | (4) The amount applicable under this subsection for a *statutory accounting period of the foreign company is worked out using the following formula: [pic] where: active insurance amount means: (a) if the foreign company is a *foreign life insurance company-the untainted policy liabilities (within the meaning of subsection 446(2) of the Income Tax Assessment Act 1936) of the foreign company for the statutory accounting period; or (b) if the foreign company is a *foreign general insurance company- the active general insurance amount worked out under subsection (5) for the statutory accounting period. total insurance assets means: (a) if the foreign company is a *foreign life insurance company-the total assets (within the meaning of subsection 446(2) of the Income Tax Assessment Act 1936) of the foreign company for the statutory accounting period; or (b) if the foreign company is a *foreign general insurance company- the total assets (within the meaning of subsection 446(4) of that Act) of the foreign company for the statutory accounting period. value of non-active foreign business assets means: (a) for the purposes of item 1 of the table in subsection (3)-the difference between: (i) the result of step 1 of the method statement in subsection 768- 520(1); and (ii) the result of step 2 of that method statement (apart from this section); or (b) for the purposes of item 2 of the table in subsection (3)-the difference between: (i) the result of step 1 of the method statement in subsection 768- 525(2); and (ii) the result of step 1 of the method statement in subsection 768- 525(3) (apart from this section); or (c) for the purposes of item 3 of the table in subsection (3)-the difference between: (i) the result of step 2 of the method statement in subsection 768- 525(2); and (ii) the result of step 2 of the method statement in subsection 768- 525(3) (apart from this section). Active insurance amount for foreign general insurance company (5) The active general insurance amount under this subsection for a *statutory accounting period of the foreign company is worked out using the following formula: [pic] where: net assets means the net assets (within the meaning of subsection 446(4) of the Income Tax Assessment Act 1936) of the foreign company for the statutory accounting period. solvency amount means the solvency amount (within the meaning of subsection 446(4) of the Income Tax Assessment Act 1936) of the foreign company for the statutory accounting period. tainted outstanding claims means the tainted outstanding claims (within the meaning of subsection 446(4) of the Income Tax Assessment Act 1936) of the foreign company for the statutory accounting period. total general insurance assets means the total assets (within the meaning of subsection 446(4) of the Income Tax Assessment Act 1936) of the foreign company for the statutory accounting period. 768-533 Foreign company that is a FIF using CFC calculation method- treatment as AFI subsidiary under this Subdivision (1) This section applies if: (a) the foreign company is a *FIF; and (b) the holding company has made a choice under subsection 559A(1) of the Income Tax Assessment Act 1936 in relation to the foreign company in respect of a *notional accounting period of the foreign company; and (c) because of the choice, the foreign company is treated under paragraph 559A(3)(c) of that Act as an AFI subsidiary (within the meaning of that Act) in relation to that holding company at a particular time. Note: If the holding company makes a choice under subsection 559A(1) of the Income Tax Assessment Act 1936, the notional income and notional deductions of the foreign company (in its capacity as a FIF) is worked out under the FIF calculation method by reference to its notional assessable income and notional allowable deductions under Part X of that Act. (2) For the purposes of this Subdivision, treat the foreign company as an AFI subsidiary in relation to that holding company at that time. 768-535 Modified rules for foreign wholly-owned groups (1) This section applies if: (a) for the purposes of section 768-505, it is necessary to work out the *active foreign business asset percentage of a company (the top foreign company) in relation to the holding company mentioned in that section, at the time of the CGT event mentioned in that section; and (b) the top foreign company is not: (i) an AFI subsidiary (within the meaning of Part X of the Income Tax Assessment Act 1936); or (ii) a *foreign life insurance company; or (iii) a *foreign general insurance company; and (c) for the purposes of section 768-505, it is also necessary (apart from this section) to work out the active foreign business asset percentage at that time of 1 or more other companies in relation to the holding company, at that time, where: (i) the top foreign company and 1 or more of those other companies (the subsidiary foreign companies) are members of a *wholly- owned group; and (ii) each of the subsidiary foreign companies is a *100% subsidiary of the top foreign company. (2) The holding company may choose to work out the *active foreign business asset percentage of the top foreign company in accordance with subsections (4) and (6). (3) The way an entity making a choice under subsection (2) prepares its *income tax return is sufficient evidence of the making of the choice. (4) If the holding company has made a choice under subsection (2), the provisions mentioned in subsection (5) operate, for the purposes of section 768-505, as if each subsidiary foreign company were a part of the top foreign company, rather than a separate entity. Note 1: This subsection means that certain assets are not treated as active foreign business assets, or as assets included in the total assets, of any of the subsidiary foreign companies or of the top foreign company. For example: (a) a share owned by one of those companies in another of those companies; and (b) a debt owed by one of those companies to another of those companies. Note 2: If an asset (other than an asset mentioned in Note 1) is actually an active foreign business asset, or an asset included in the total assets, of a subsidiary foreign company, it is treated under this subsection as an active foreign business asset, or as an asset included in the total assets, of the top foreign company. (5) For the purposes of subsection (4), the provisions are: (a) section 768-540 (active foreign business assets of a foreign company); and (b) section 768-545 (assets included in the total assets of a foreign company). (6) If the holding company has made a choice under subsection (2), then for the purposes of sections 768-510 and 768-525, treat the *recognised consolidated accounts of the top foreign company and all of the subsidiary foreign companies as the *recognised company accounts of the top foreign company. Types of assets of a foreign company 768-540 Active foreign business assets of a foreign company (1) An asset is, at a particular time, an active foreign business asset of a company (the foreign company) that is a foreign resident if, at that time: (a) the asset is an *asset included in the total assets of the company; and (b) the asset satisfies any of these conditions: (i) the asset is used, or held ready for use, by the company in the course of carrying on a *business; (ii) the asset is goodwill; (iii) the asset is a *share; and (c) the asset is not any of the following: (i) *taxable Australian property; (ii) a *membership interest in a company that is an Australian resident; (iii) a membership interest in a *resident trust for CGT purposes; (iv) an option or right to acquire a membership interest mentioned in subparagraph (ii) or (iii); and (d) the asset is not covered by subsection (2); and (e) if the foreign company is an AFI subsidiary (within the meaning of Part X of the Income Tax Assessment Act 1936) whose sole or principal business is financial intermediary business-the asset is not covered under subsection (4). (2) An asset is covered by this subsection if it is: (a) a financial instrument (other than a *share or a trade debt); or (b) either: (i) an eligible finance share (within the meaning of Part X of the Income Tax Assessment Act 1936); or (ii) a widely distributed finance share (within the meaning of that Part); or (c) an interest in a trust or *partnership; or (d) a *life insurance policy; or (e) a right or option in respect of: (i) a financial instrument; or (ii) an interest in a company, trust or partnership; or (iii) a life insurance policy; or (f) cash or cash equivalent; or (g) an asset whose main use in the course of carrying on the *business mentioned in subparagraph (1)(b)(i) is to *derive interest, an *annuity, rent, *royalties or foreign exchange gains unless: (i) the asset is an intangible asset and has been substantially developed, altered or improved by the foreign company so that its *market value has been substantially enhanced; or (ii) its main use for deriving rent was only temporary. (3) If, at the time mentioned in subsection (1), the foreign company is an AFI subsidiary (within the meaning of Part X of the Income Tax Assessment Act 1936) whose sole or principal business is financial intermediary business (within the meaning of that Part), subsection (2) operates as if: (a) paragraphs (2)(a) and (f) were omitted; and (b) paragraph (2)(g) did not contain a reference to interest, an *annuity or foreign exchange gains; and (c) subparagraph (2)(e)(i) were omitted and the following subparagraph were substituted: (i) a financial instrument, other than an asset mentioned in paragraph 450(1)(b) of the Income Tax Assessment Act 1936; or (4) The asset is covered under this subsection if: (a) all of these conditions are satisfied: (i) the asset is an asset mentioned in subparagraph 450(4)(b)(i) or (ii) of the Income Tax Assessment Act 1936; (ii) the asset was acquired from another entity; (iii) either of the conditions mentioned in subparagraph 450(6)(c)(i) and (ii) of the Income Tax Assessment Act 1936 were satisfied in relation to the other entity at the time of the acquisition; or (b) both of these conditions are satisfied: (i) the asset relates to a debt to which factoring income (within the meaning of Part X of the Income Tax Assessment Act 1936) of the foreign company relates; (ii) the condition in paragraph 450(8)(b) of the Income Tax Assessment Act 1936 is satisfied in relation to the debt. 768-545 Assets included in the total assets of a foreign company (1) At a particular time, an asset is an asset included in the total assets of a company (the foreign company) that is a foreign resident if: (a) the asset is a *CGT asset at that time; and (b) the foreign company owns the asset at that time; and (c) if at that time the foreign company is not an AFI subsidiary (within the meaning of Part X of the Income Tax Assessment Act 1936) whose sole or principal business is financial intermediary business (within the meaning of that Part)-the asset is not a foreign company derivative asset covered by subsection (2). (2) An asset is a foreign company derivative asset covered by this subsection if: (a) the asset is an *arrangement covered by subsection (3), unless the regulations declare the asset not to be a foreign company derivative asset covered by this subsection; or (b) the regulations declare the asset to be a foreign company derivative asset covered by this subsection. (3) An *arrangement is covered by this subsection if: (a) under the arrangement, a party to the arrangement must, or may be required to, provide at some future time consideration of a particular kind or kinds to someone; and (b) that future time is not less than the number of days, prescribed by regulations made for the purposes of paragraph 761D(1)(b) of the Corporations Act 2001, after the day on which the arrangement is entered into; and (c) the amount of the consideration, or the value of the arrangement, is ultimately determined, *derived from or varies by reference to (wholly or in part) the value or amount of something else (of any nature whatsoever and whether or not deliverable), including, for example, one or more of the following: (i) an asset; (ii) a rate (including an interest rate or exchange rate); (iii) an index; (iv) a commodity; and (d) subsection (4) does not apply in relation to the arrangement. (4) An *arrangement under which one person has an obligation to buy, and another person has an obligation to sell, property is not an arrangement covered by subsection (3) merely because the arrangement provides for the consideration to be varied by reference to a general inflation index such as the Consumer Price Index. Voting percentages in a company 768-550 Direct voting percentage in a company (1) An entity's direct voting percentage at a particular time in a company is: (a) if the entity has a voting interest (within the meaning of section 334A of the Income Tax Assessment Act 1936) in the foreign company at that time amounting to a percentage of the voting power of the company-that percentage; or (b) otherwise-zero. (2) In applying section 334A of the Income Tax Assessment Act 1936 for the purposes of subsection (1) of this section, assume that: (a) the entity is a company; and (b) the entity is not the beneficial owner of a *share in the company if a trust or partnership is interposed between the entity and the company. 768-555 Indirect voting percentage in a company (1) An entity's indirect voting percentage at a particular time in a company (the subsidiary company) is worked out by multiplying: (a) the entity's *direct voting percentage (if any) in another company (the intermediate company) at that time; by: (b) the sum of: (i) the intermediate company's direct voting percentage (if any) in the subsidiary company at that time; and (ii) the intermediate company's indirect voting percentage (if any) in the subsidiary company at that time (as worked out under one or more other applications of this section). (2) If there is more than one intermediate company to which subsection (1) applies at that time, the entity's indirect voting percentage is the sum of the percentages worked out under subsection (1) in relation to each of those intermediate companies. 768-560 Total voting percentage in a company An entity's total voting percentage at a particular time in a company is the sum of: (a) the entity's *direct voting percentage in the company at that time; and (b) the entity's *indirect voting percentage in the company at that time. Subdivision 768-R-Temporary residents Guide to Subdivision 768-R 768-900 What this Subdivision is about This Subdivision modifies the general tax rules for people in Australia who are temporary residents, whether Australian residents or foreign residents. Generally foreign income derived by temporary residents is non- assessable non-exempt income and capital gains and losses they make are also disregarded for CGT purposes. There are some exceptions for employment-related income and capital gains on shares and rights acquired under employee share schemes. Temporary residents are also partly relieved of record-keeping obligations in relation to the controlled foreign company and foreign investment fund rules. Interest paid by temporary residents is not subject to withholding tax and may be non-assessable non-exempt income for a foreign resident. Table of sections Operative provisions 768-905 Objects 768-910 Income derived by temporary resident 768-915 Certain capital gains and capital losses of temporary resident to be disregarded 768-920 Capital gains and losses on employee shares and rights where taxation of discount not deferred 768-925 Notional gain or loss 768-930 Adjustment to notional gain or loss 768-935 Adjustment for share or right acquired under employee share scheme 768-940 Adjustment for derived share 768-945 Amending assessment to take account of effect on capital gain or loss of recalculating discount 768-950 Individual becoming an Australian resident 768-955 Temporary resident who ceases to be temporary resident but remains an Australian resident 768-960 Temporary resident not attributable taxpayer for purposes of controlled foreign companies rules 768-965 Exemption of temporary resident from taxation in respect of foreign investment fund income 768-970 Modification of rules for accruals system of taxation of certain non-resident trust estates 768-975 Calculation of beneficiary's share of net income of non- resident trust estate 768-980 Interest paid by temporary resident Operative provisions 768-905 Objects The objects of this Subdivision are to: (a) provide *temporary residents with tax relief on most foreign source income and capital gains; and (b) relieve the burdens associated with complying with certain record-keeping obligations and interest withholding tax obligations. 768-910 Income derived by temporary resident (1) The following are *non-assessable non-exempt income: (a) the *ordinary income you *derive directly or indirectly from a source other than an *Australian source if you are a *temporary resident when you derive it; (b) your *statutory income (other than a *net capital gain) from a source other than an Australian source if you are a temporary resident when you derive it. This subsection has effect subject to subsections (3) and (5). Note: A capital gain or loss you make may be disregarded under section 768-915. (2) For the purposes of paragraph (1)(b): (a) if you have statutory income because a particular circumstance occurs, you derive the statutory income at the time when the circumstance occurs; and (b) if you have statutory income because a number of circumstances occur, you derive the statutory income at the time when the last of those circumstances occurs. Exception to subsection (1) (3) However, the following are not *non-assessable non-exempt income under subsection (1): (a) the *ordinary income you *derive directly or indirectly from a source other than an *Australian source to the extent that it is remuneration, for employment undertaken, or services provided, while you are a *temporary resident; (b) your *statutory income (other than a *net capital gain) from a source other than an Australian source to the extent that it relates to employment undertaken, or services provided, while you are a temporary resident; (c) an amount included in your assessable income under Division 86; (d) an amount that, but for subsection (1), would be included in your assessable income under Division 13A of Part III of the Income Tax Assessment Act 1936. Note: This subsection only makes an amount not non-assessable non-exempt income under subsection (1). It does not prevent that amount from being non-assessable non-exempt income under some other provision of this Act or the Income Tax Assessment Act 1936. Section 26AAC employee share schemes (4) This subsection applies if: (a) an amount would otherwise be included in your assessable income under section 26AAC of the Income Tax Assessment Act 1936 (about shares and rights acquired by employees); and (b) the applicable time mentioned in subsection 26AAC(15) of that Act for the relevant *share occurs while you are a *temporary resident. (5) If subsection (4) applies, the amount is *non-assessable non- exempt income to the extent to which you acquired the relevant *share under a scheme for the acquisition of shares by employees in respect of, or for or in relation (directly or indirectly) to: (a) any employment you undertook outside Australia; or (b) any services you provided outside Australia; prior to becoming a *temporary resident. (6) Subsection (5) does not limit paragraph (1)(b). 768-915 Certain capital gains and capital losses of temporary resident to be disregarded A *capital gain or *capital loss you make from a *CGT event is disregarded if: (a) you are a *temporary resident when, or immediately before, the CGT event happens; and (b) you would not make a capital gain or loss from the CGT event, or the capital gain or loss from the CGT event would have been disregarded under Division 855, if you were a foreign resident when, or immediately before, the CGT event happens. 768-920 Capital gains and losses on employee shares and rights where taxation of discount not deferred When this section applies (1) This section applies to a *share or right if: (a) you *acquire the share or right under an *employee share scheme; and (b) you engage in employment, or render services, that affect the holding or acquisition of the shares or rights while you are a *temporary resident; and (c) the share or right is not *taxable Australian property; and (d) either: (i) the share or right is not a *qualifying share or *qualifying right; or (ii) the share or right is a qualifying share or qualifying right and you have made an election under section 139E of the Income Tax Assessment Act 1936 covering the share or right; and (e) a *CGT event happens in relation to the share or right; and (f) if the CGT event is CGT event I1-you are not a temporary resident immediately before the event happens; and (g) you would make a *capital gain or *capital loss from the CGT event, and the capital gain or capital loss would not be disregarded, if you were an Australian resident (but not a temporary resident) when the CGT event happens; and (h) this section has not previously applied to you in relation to a CGT event in relation to the share or right. Note 1: Paragraph (a)-section 139DQ of the Income Tax Assessment Act 1936 applies for the purposes of this Subdivision to treat a matching share or right issued as part of a 100% takeover or restructure as a continuation of the share or right it matches. Note 2: For a stapled security acquired under an employee share scheme, the operation of this Subdivision is affected by section 130-97. (2) This section also applies to a *share (the derived share) if: (a) you *acquire a right (the original right) under an *employee share scheme; and (b) you engage in employment, or render services, that affect the holding or acquisition of the original right, or the derived share, while you are a *temporary resident; and (c) you acquire the derived share by exercising the original right; and (d) the derived share is not *taxable Australian property; and (e) either: (i) the original right is not a *qualifying right; or (ii) the original right is a qualifying right and you have made an election under section 139E of the Income Tax Assessment Act 1936 covering the original right; and (f) a *CGT event happens in relation to the derived share; and (g) if the CGT event is CGT event I1-you are not a temporary resident immediately before the event happens; and (h) you would make a *capital gain or *capital loss from the CGT event, and the capital gain or capital loss would not be disregarded, if you were an Australian resident (but not a temporary resident) when the CGT event happens; and (i) this section has not previously applied to you in relation to the original right or the derived share. Note 1: Paragraph (a)-section 139DQ of the Income Tax Assessment Act 1936 applies for the purposes of this Subdivision to treat a matching share or right issued as part of a 100% takeover or restructure as a continuation of the share or right it matches. Note 2: For a stapled security acquired under an employee share scheme, the operation of this Subdivision is affected by section 130-97. (3) To avoid doubt, paragraph (1)(e) or (2)(f) applies: (a) even if you are not a *temporary resident when the *CGT event happens; and (b) whether you are an Australian resident or a foreign resident when the CGT event happens. Capital gain or loss (4) If you are a *temporary resident or a foreign resident when the *CGT event happens, you make a *capital gain or *capital loss from the CGT event. Note: If you are an Australian resident (but not a temporary resident) when the CGT event occurs, neither section 768-915 nor Division 855 prevents you having a capital gain or capital loss. (5) Subsection (4) has effect despite section 768-915 and Division 855. Amount of capital gain or capital loss for temporary residents and foreign residents (6) If you are a *temporary resident or a foreign resident when the *CGT event happens, the amount of the *capital gain or *capital loss is the amount of your adjusted notional gain or loss worked out under subsection (9). Amount of capital gain or capital loss for Australian residents (7) If you are an Australian resident (but not a *temporary resident) when the *CGT event happens, the amount of the *capital gain or *capital loss is the sum of: (a) the amount that would be the amount of your capital gain or capital loss if this section did not apply to you; and (b) the amount of your adjusted notional gain or loss worked out under subsection (9). Example: George, a New Zealander, is granted shares (with a total market value at the time of $100,000) under an employee share scheme on 20 January 2006. He comes to Australia as a temporary resident on 1 January 2007 and completes the rest of the employment to which the shares relate in Australia. George elects to have the discount assessed in that income year. He then ceases to be a temporary resident but remains an Australian resident on 8 May 2008. At that time the shares have a market value of $80,000. George disposes of the shares on 30 June 2009 for $115, 000. George's capital gain for the purpose of paragraph (a) would be $35,000. Assume that the amount of the loss that accrued up to 8 May 2008 that is to be counted for the purpose of paragraph (b) is $9,000. For the year ending 30 June 2009, George would, as a result of subsection (7), make a capital gain of $26,000 (being $35,000 less $9,000). (8) If subsection (7) applies to the *CGT event, subsections 768- 955(3) and 855-45(3) do not apply for the purposes of applying Division 115 in relation to the CGT event. Adjusted notional gain or loss (9) To work out your adjusted notional gain or loss: (a) work out your notional gain or loss using section 768-925; and (b) adjust your notional gain or loss using sections 768-930, 768- 935 and 768-940. 768-925 Notional gain or loss (1) Your notional gain or loss is the *capital gain or *capital loss you would have had in relation to the *CGT event if, for the whole of the period set by subsections (2) and (3), you: (a) had been an Australian resident; and (b) had not been a *temporary resident. (2) The period starts: (a) in the case of section 768-920 applying to the *share or right in relation to which the *CGT event happens because of subsection 768-920(1): (i) if the share or right was acquired from an *employee share trust-when you first acquired a beneficial interest in the share or right; or (ii) if subparagraph (i) does not apply-when you *acquired that share or right; and (b) in the case of section 768-920 applying to the *share in relation to which the *CGT event happens because of subsection 768-920(2): (i) if the share was acquired from an *employee share trust-when you first acquired a beneficial interest in the original right; or (ii) if subparagraph (i) does not apply-when you *acquired the original right. (3) The period ends when the *CGT event happens. (4) If you are an Australian resident (but not a *temporary resident) when the *CGT event happens, your notional gain or loss is reduced by the amount of the *capital gain or *capital loss that you would have made in relation to the *CGT event if section 768- 920 did not apply to you. 768-930 Adjustment to notional gain or loss (1) If section 768-920 applies to the *share or right in relation to which the *CGT event happens because of subsection 768-920(1), adjust your notional gain or loss by: (a) firstly, applying the factor worked out under subsection 768- 935(1), (2) or (3) to the amount of your notional gain or loss; and (b) secondly, applying the factor worked out under subsection 768- 935(4) to the amount worked out under paragraph (a). (2) If section 768-920 applies to the *share in relation to which the *CGT event happens because of subsection 768-920(2), adjust your notional gain or loss by: (a) firstly, applying the factor worked out under subsection 768- 940(1), (2) or (3) to the amount of your notional gain or loss; and (b) secondly, applying the factor worked out under subsection 768- 940(4) to the amount worked out under paragraph (a). 768-935 Adjustment for share or right acquired under employee share scheme (1) If: (a) the *CGT event happens on or after the *cessation time for the share or right; and (b) when, or immediately before, the CGT event happens you are either: (i) a foreign resident; or (ii) an Australian resident who is a temporary resident; the factor to be applied for the purposes of paragraph 768- 930(1)(a) is: [pic] where: days before cessation time is the number of days in the period that: (a) starts on the day on which you *acquired the *share or right or, if you acquired the share or right from an *employee share trust, on the day on which you first acquired a beneficial interest in the share or right; and (b) ends on the *cessation time for the share or right. days before CGT event is the number of days in the period that: (a) starts on the day on which you *acquired the *share or right or, if you acquired the share or right from an *employee share trust, on the day on which you first acquired a beneficial interest in the share or right; and (b) ends on the day on which the *CGT event happens. (2) If: (a) the *CGT event happens on or after the *cessation time for the share or right; and (b) when, or immediately before, the CGT event happens you are an Australian resident (but not a *temporary resident); the factor to be applied for the purposes of paragraph 768- 930(1)(a) is: [pic] where: days before cessation time is the number of days in the period that: (a) starts on the day on which you *acquired the *share or right or, if you acquired the share or right from an *employee share trust, on the day on which you first acquired a beneficial interest in the share or right; and (b) ends on the *cessation time for the share or right. days before ceasing to be a temporary resident is the number of days in the period that: (a) starts on the day on which you *acquired the *share or right or, if you acquired the share or right from an *employee share trust, on the day on which you first acquired a beneficial interest in the share or right; and (b) ends on the day on which you cease to be a *temporary resident. (3) The factor to be applied for the purposes of paragraph 768- 930(1)(a) is 1 if: (a) the CGT event happens before the *cessation time for the *share or right; or (b) you became an Australian resident who was not a *temporary resident before the cessation time for the share or right. (4) The factor to be applied for the purposes of paragraph 768- 930(1)(b) is: [pic] where: assessable part of discount is the amount of the discount that: (a) was included in your assessable income under Division 13A of Part III of the Income Tax Assessment Act 1936 in relation to the *share or right; or (b) would have been included in your assessable income under that Division in relation to the share or right if subsection 139BA(2) of that Act were disregarded. discount is the amount of the discount. 768-940 Adjustment for derived share (1) If: (a) the *CGT event happens on or after the *cessation time for the original right; and (b) when, or immediately before, the CGT event happens you are either: (i) a foreign resident; or (ii) an Australian resident who is a *temporary resident; the factor to be applied for the purposes of paragraph 768- 930(2)(a) is: [pic] where: days before cessation time is the number of days in the period that: (a) starts on the day on which you *acquired the original right or, if you acquired the *share from an *employee share trust, on the day on which you first acquired a beneficial interest in the original right; and (b) ends on the *cessation time for the original right. days before CGT event is the number of days in the period that: (a) starts on the day on which you *acquired the original right or, if you acquired the *share from an *employee share trust, on the day on which you first acquired a beneficial interest in the original right; and (b) ends on the day on which the *CGT event happens. (2) If: (a) the *CGT event happens on or after the *cessation time for the original right; and (b) when, or immediately before, the CGT event happens you are an Australian resident (but not a *temporary resident); the factor to be applied for the purposes of paragraph 768- 930(2)(a) is: [pic] where: days before cessation time is the number of days in the period that: (a) starts on the day on which you *acquired the original right or, if you acquired the *share from an *employee share trust, on the day on which you first acquired a beneficial interest in the original right; and (b) ends on the *cessation time for the original right. days before ceasing to be a temporary resident is the number of days in the period that: (a) starts on the day on which you *acquired the original right or, if you acquired the *share from an *employee share trust, on the day on which you first acquired a beneficial interest in the original right; and (b) ends on the day on which you cease to be a *temporary resident. (3) The factor to be applied for the purposes of paragraph 768- 930(2)(a) is 1 if: (a) the *CGT event happens before the *cessation time for the original right; or (b) you became an Australian resident who was not a *temporary resident before the cessation time for the original right. (4) The factor to be applied for the purposes of paragraph 768- 930(2)(b) is: [pic] where: assessable part of discount is the amount of the discount that: (a) was included in your assessable income under Division 13A of Part III of the Income Tax Assessment Act 1936 in relation to the original right; or (b) would have been included in your assessable income under that Division in relation to the original right if subsection 139BA(2) of that Act were disregarded. discount is the amount of the discount. 768-945 Amending assessment to take account of effect on capital gain or loss of recalculating discount (1) This section applies if: (a) an amount is included in your assessable income, or you have a net capital loss, for a particular income year; and (b) that amount is reduced, or increased, because of a change in the extent (if any) to which any of the following provisions of the Income Tax Assessment Act 1936 apply in relation to the amount during a subsequent income year: (i) section 23AF; (ii) section 23AG; (iii) subsection 139B(1A). (2) In paragraph (1)(b): (a) the reference to an amount being reduced includes a reference to the amount being reduced to a nil amount; and (b) the reference to an amount being increased includes a reference to the amount being increased from a nil amount. (3) Section 170 of the Income Tax Assessment Act 1936 does not prevent the amendment of an assessment to take account of the effect that the reduction or increase has on the determination of the amount of a *capital gain or *capital loss under subsection 768- 920(6) or (7). (4) If section 768-920 applies to the *share or right in relation to which the *CGT event occurs because of subsection 768-920(1), the amendment must be made before the end of the period of 4 years starting immediately after the income year during which the period of employment or service relating to the *acquisition of the share or right ends. (5) If section 768-920 applies to the *share or right in relation to which the *CGT event occurs because of subsection 768-920(2), the amendment must be made before the end of the period of 4 years starting immediately after the income year during which the period of employment or service relating to the *acquisition of the original right ends. 768-950 Individual becoming an Australian resident Section 855-45 does not apply to your becoming an Australian resident if you are a *temporary resident immediately after you become an Australian resident. 768-955 Temporary resident who ceases to be temporary resident but remains an Australian resident (1) If you are a *temporary resident and you then cease to be a temporary resident (but remain, at that time, an Australian resident), there are rules relevant to each *CGT asset that: (a) you owned just before you ceased to be a temporary resident; and (b) is not *taxable Australian property; and (c) you *acquired on or after 20 September 1985. (2) The first element of the *cost base and *reduced cost base of the asset (at the time you cease to be a *temporary resident) is its *market value at that time. This subsection has effect despite Subdivision 130-D. (3) Also, Parts 3-1 and 3-3 apply to the asset as if you had *acquired it at the time you ceased to be a *temporary resident. (4) This section does not apply to a *share or right if: (a) it is a *qualifying share or a *qualifying right; and (b) you have not made an election under section 139E of the Income Tax Assessment Act 1936 covering the share or right; and (c) the *cessation time for the share or right has not occurred. 768-960 Temporary resident not attributable taxpayer for purposes of controlled foreign companies rules For the purposes of Part X of the Income Tax Assessment Act 1936 (which deals with the attribution of income in respect of controlled foreign companies), you are taken not to be an *attributable taxpayer in relation to a *CFC or *CFT at any time you are a *temporary resident. 768-965 Exemption of temporary resident from taxation in respect of foreign investment fund income If you are a *temporary resident at the end of an income year, section 529 and Division 22 of Part XI of the Income Tax Assessment Act 1936 do not apply to you in relation to a *FIF or *FLP in respect of the notional accounting period of the FIF or FLP that ends in that income year. 768-970 Modification of rules for accruals system of taxation of certain non-resident trust estates At any time when you are a *temporary resident, you are taken not to be a resident for the purposes of section 102AAZD of the Income Tax Assessment Act 1936. 768-975 Calculation of beneficiary's share of net income of non-resident trust estate At any time when you are a *temporary resident, you are taken not to be a resident for the purposes of subsection 96C(6) of the Income Tax Assessment Act 1936. 768-980 Interest paid by temporary resident Interest that is paid by a *temporary resident: (a) is an amount to which section 128B (liability to withholding tax) of the Income Tax Assessment Act 1936 does not apply; and (b) is *non-assessable non-exempt income if the interest is: (i) *derived by a foreign resident; and (ii) is not derived from carrying on *business in Australia at or through a *permanent establishment in Australia. Division 770-Foreign income tax offsets Table of Subdivisions Guide to Division 770 770-A Entitlement rules for foreign income tax offsets 770-B Amount of foreign income tax offset 770-C Rules about payment of foreign income tax 770-D Administration Guide to Division 770 770-1 What this Division is about You may get a non-refundable tax offset for foreign income tax paid on your assessable income. There is a limit on the amount of the tax offset. A resident of a foreign country does not get the offset for some foreign income taxes. You may also get the offset for foreign income tax paid on some amounts that are not taxed in Australia. 770-5 Object (1) The object of this Division is to relieve double taxation where: (a) you have paid foreign income tax on amounts included in your assessable income; and (b) you would, apart from this Division, pay Australian income tax on the same amounts. (2) To achieve this object, this Division gives you a tax offset to reduce or eliminate Australian income tax otherwise payable on those amounts. Subdivision 770-A-Entitlement rules for foreign income tax offsets Table of sections Basic entitlement rule for foreign income tax offset 770-10 Entitlement to foreign income tax offset 770-15 Meaning of foreign income tax, credit absorption tax and unitary tax Basic entitlement rule for foreign income tax offset 770-10 Entitlement to foreign income tax offset (1) You are entitled to a *tax offset for an income year for *foreign income tax. An amount of foreign income tax counts towards the tax offset for the year if you paid it in respect of an amount that is all or part of an amount included in your assessable income for the year. Note 1: The offset is for the income year in which your assessable income included an amount in respect of which you paid foreign income tax-even if you paid the foreign income tax in another income year. Note 2: If the foreign income tax has been paid on an amount that is part non-assessable non-exempt income and part assessable income for you for the income year, only a proportionate share of the foreign income tax (the share that corresponds to the part that is assessable income) will count towards the tax offset (excluding the operation of subsection (2)). Note 3: For offshore banking units, the amount of foreign income tax paid in respect of offshore banking income is reduced: see subsection 121EG(3A) of the Income Tax Assessment Act 1936. Taxes paid on section 23AI or 23AK amounts (2) An amount of *foreign income tax counts towards the *tax offset for you for the year if you paid it in respect of an amount that is your *non-assessable non-exempt income under either section 23AI or 23AK of the Income Tax Assessment Act 1936 for the year. Note 1: Sections 23AI and 23AK of the Income Tax Assessment Act 1936 provide that amounts paid out of income previously attributed from a controlled foreign company or a foreign investment fund are non-assessable non-exempt income. Note 2: Foreign income taxes covered by this subsection are direct taxes (for example, a withholding tax on a dividend payment) and not underlying taxes, only some of which are covered by section 770-135. Exception for certain residence-based foreign income taxes (3) An amount of *foreign income tax you paid does not count towards the *tax offset for the year if you paid it: (a) to a foreign country because you are a resident of that country for the purposes of a law relating to the foreign income tax; and (b) in respect of an amount derived from a source outside that country. Exception for previously complying funds and previously foreign funds (4) An amount of *foreign income tax paid by a *superannuation provider in relation to a *superannuation fund does not count towards the *tax offset for the year if: (a) the tax was paid in respect of an amount included in the fund's assessable income under table item 2 or 3 in section 295-320; and (b) the provider paid the tax before the start of the income year. Note: Table items 2 and 3 in section 295-320 include additional amounts in the assessable income of superannuation funds that change their status from complying to non-complying or from foreign to Australian. Exception for credit absorption tax and unitary tax (5) An amount of *credit absorption tax or *unitary tax you paid does not count towards the *tax offset for the year. 770-15 Meaning of foreign income tax, credit absorption tax and unitary tax (1) Foreign income tax means tax that: (a) is imposed by a law other than an *Australian law; and (b) is: (i) tax on income; or (ii) tax on profits or gains, whether of an income or capital nature; or (iii) any other tax, being a tax that is subject to an agreement having the force of law under the International Tax Agreements Act 1953. Note: Foreign income tax includes only that which has been correctly imposed in accordance with the relevant foreign law or, where the foreign jurisdiction has a tax treaty with Australia (having the force of law under the International Tax Agreements Act 1953), has been correctly imposed in accordance with that tax treaty. (2) Credit absorption tax means a tax imposed by a law of a foreign country, or of any part of, or place in, a foreign country to the extent that the tax would not have been payable if the entity concerned or another entity had not been entitled to an offset in respect of the tax under this Division. (3) Unitary tax means a tax imposed by a law of a foreign country, or of any part of, or place in, a foreign country, being a law which, for the purposes of taxing income, profits or gains of a company derived from sources within that country, takes into account, or is entitled to take into account, income, losses, outgoings or assets of the company (or of a company that for the purposes of that law is treated as being associated with the company) derived, incurred or situated outside that country, but does not include tax imposed by that law if that law only takes those matters into account: (a) if such an associated company is a resident of the foreign country for the purposes of the law of the foreign country; or (b) for the purposes of granting any form of relief in relation to tax imposed on dividends received by one company from another company. Subdivision 770-B-Amount of foreign income tax offset Guide to Subdivision 770-B 770-65 What this Subdivision is about The amount of your tax offset is based on the amount of foreign income tax you have paid. However, there is a limit on the maximum amount of your offset. The limit is the greater of $1,000 and an amount worked out under this Subdivision. This amount is based on a comparison between your tax liability and the tax liability you would have if certain foreign- taxed and foreign-sourced income and related deductions were disregarded. You may choose to use the limit of $1,000 and not work out this amount. There is an increase in the limit to ensure foreign income tax paid on some amounts that are not taxed always forms part of the offset. Table of sections Operative provisions 770-70 Amount of foreign income tax offset 770-75 Foreign income tax offset limit 770-80 Increase in offset limit for tax paid on amounts to which section 23AI or 23AK of the Income Tax Assessment Act 1936 apply Operative provisions 770-70 Amount of foreign income tax offset The amount of your *tax offset for the year is the sum of the *foreign income tax you paid that counts towards the offset for the year. Note 1: The amount of foreign income tax you paid may be affected by Subdivision 770-C. Note 2: The amount of the offset might be increased under section 770-230 of the Income Tax (Transitional Provisions) Act 1997, if you have pre-commencement excess foreign income tax. 770-75 Foreign income tax offset limit (1) There is a limit (the offset limit) on the amount of your *tax offset for a year. If your tax offset exceeds the offset limit, reduce the offset by the amount of the excess. (2) Your offset limit is the greater of: (a) $1,000; and (b) this amount: (i) the amount of income tax payable by you for the income year; less (ii) the amount of income tax that would be payable by you for the income year if the assumptions in subsection (4) were made. Note 1: If you do not intend to claim a foreign income tax offset of more than $1,000 for the year, you do not need to work out the amount under paragraph (b). Note 2: The amount of the offset limit might be increased under section 770-80. (3) For the purposes of paragraph (2)(b), work out the amount of income tax payable by you, or that would be payable by you, disregarding any *tax offsets. (4) Assume that: (a) your assessable income did not include: (i) so much of any amount included in your assessable income as represents an amount in respect of which you paid *foreign income tax that counts towards the *tax offset for the year; and (ii) any other amounts of *ordinary income or *statutory income from a source other than an *Australian source; and (b) you were not entitled to any deductions that: (i) are *debt deductions that are attributable to an *overseas permanent establishment of yours; or (ii) are deductions (other than debt deductions) that are reasonably related to amounts covered by paragraph (a) for that year. Note: You must also assume you were not entitled to any deductions for certain converted foreign losses: see section 770-35 of the Income Tax (Transitional Provisions) Act 1997. Example: If an entity has paid foreign income tax on a capital gain that comprises part of its net capital gain, only that capital gain on which foreign income tax has been paid is disregarded. 770-80 Increase in offset limit for tax paid on amounts to which section 23AI or 23AK of the Income Tax Assessment Act 1936 apply Your offset limit under subsection 770-75(2) is increased by any amounts of *foreign income tax that count towards the *tax offset for you for the year because of subsection 770-10(2). Subdivision 770-C-Rules about payment of foreign income tax Table of sections Rules about when foreign tax is paid 770-130 When foreign income tax is considered paid-taxes paid by someone else 770-135 Foreign income tax paid by CFCs and FIFs on attributed amounts Rules about when foreign tax is considered not paid 770-140 When foreign income tax is considered not paid-anti- avoidance rule Rules about when foreign tax is paid 770-130 When foreign income tax is considered paid-taxes paid by someone else (1) This Act applies to you as if you had paid an amount of *foreign income tax in respect of an amount (a taxed amount) that is all or part of an amount included in your *ordinary income or *statutory income if you are covered by subsection (2) or (3) for an amount of foreign income tax paid in respect of the taxed amount. (2) You are covered by this subsection for an amount of *foreign income tax paid in respect of a taxed amount if that foreign income tax has been paid in respect of the taxed amount by another entity under an *arrangement with you or under the law relating to the foreign income tax. Example: You are a partner in a partnership and the partnership pays foreign income tax on the partnership income. (3) You are covered by this subsection for an amount of *foreign income tax paid in respect of the taxed amount to the extent that: (a) the taxed amount is taken, because of section 6B of the Income Tax Assessment Act 1936 (the 1936 Act), to be attributable to another amount of income of a particular kind or source; and (b) foreign income tax has been paid in respect of the other amount of income; and (c) the taxed amount is less than it would have been if that tax had not been paid. Example: Aust Co (an Australian resident) is the sole beneficiary of an Australian resident trust H and is presently entitled to all the income of trust H. Trust H owns shares in For Co (a foreign company). For Co pays a dividend to trust H and the dividend is subject to withholding tax in For Co's country of residence. Trust H allocates to Aust Co, the dividend, as well as other Australian source income trust H earned in the year (none of which was subject to foreign income tax). Aust Co is treated as having paid the foreign income tax paid by For Co under subsection 770-130(3). The foreign income tax is treated as paid in respect of the amount included in Aust Co's assessable income that is attributable to the dividend. 770-135 Foreign income tax paid by CFCs and FIFs on attributed amounts (1) This Division applies to an entity (other than a *CFC or a *FIF) as if it had paid an amount of *foreign income tax worked out under subsection (7) in respect of an amount included in its assessable income if: (a) the amount is included in its assessable income as described in subsection (2); and (b) the conditions in subsections (3), (5) and (6) are satisfied. (2) An amount is included in an entity's assessable income as described in this subsection if: (a) the entity is a company and the amount is included under: (i) section 456 (a section 456 case) of the 1936 Act in relation to a *CFC and a statutory accounting period; or (ii) section 457 (a section 457 case) of that Act in relation to a CFC; or (iii) section 529 of that Act in relation to a foreign company (within the meaning of Part XI of that Act) (a foreign company case) in respect of a notional accounting period (within the meaning of that Part) (a notional accounting period); or (b) the amount is included under section 529 of that Act in relation to a foreign trust (within the meaning of Part XI of that Act) (a foreign trust case) in respect of a notional accounting period. Note: Section 456 of the 1936 Act includes, in the assessable income of certain Australian shareholders, amounts that are attributable to the profits of an Australian-controlled foreign company. Section 457 does likewise when a controlled foreign company changes residence from an unlisted to a listed country or to Australia. Section 529 includes, in the assessable income of resident taxpayers, amounts that are attributable to FIF interests held in foreign companies and in foreign trusts. Tax paid condition (3) An amount of *foreign income tax, income tax or *withholding tax (the tax amount) must have been paid: (a) for a section 456 case-by the *CFC in respect of an amount included in the notional assessable income of the CFC for the statutory accounting period; or (b) for a section 457 case-by the CFC; or (c) for a foreign company case or a foreign trust case-by the foreign company or foreign trust in respect of an amount included in its notional income (within the meaning of Part XI of the 1936 Act) of the notional accounting period. Note: Section 770-130 deems foreign income tax to have been paid in certain circumstances. (4) For the purposes of paragraphs (3)(a) and (b), the tax amount includes an amount that is taken to have been paid by the *CFC under subsection 393(4) of the 1936 Act (about tax paid on reinsurance premiums). Association condition (5) If the entity is a company, it must have an *attribution percentage of 10% or more: (a) for a section 456 case-in relation to the *CFC at the end of the statutory accounting period; or (b) for a section 457 case-in relation to the CFC at the residence- change time (within the meaning of section 457 of the 1936 Act); or (c) for a foreign company case-at the end of the notional accounting period. Note: There is no association condition for a foreign trust case. Calculation method condition for FIFs (6) For a foreign company case and a foreign trust case, the amount included under section 529 of the 1936 Act must have been determined by the application of the calculation method set out in Subdivision D of Division 18 of Part XI of that Act (the calculation method). Amount of foreign income tax (7) The amount worked out under this subsection is: (a) for a section 456 case-the sum of all the tax amounts for the statutory accounting period multiplied by the company's *attribution percentage in relation to the *CFC at the time mentioned in paragraph (5)(a); or (b) for a section 457 case-the sum of all the tax amounts to the extent they are attributable to the amount included in the company's assessable income under section 457 of the 1936 Act; or (c) for a foreign company case or a foreign trust case-an amount worked out using the following formula: [pic] where: entity's share of calculated profit means the share of the calculated profit of the foreign company or foreign trust in respect of the notional accounting period to which the entity is entitled as determined under the calculation method. FIF's calculated profit means the calculated profit of the foreign company or foreign trust in respect of the notional accounting period as determined under the calculation method. Grossing-up of attributed amount (8) For the purposes of this Act except this section and: (a) section 371 of the 1936 Act (for a section 456 case or a section 457 case); or (b) section 605 of that Act (for a foreign company case or a foreign trust case); the amount included in the entity's assessable income as described in subsection (2) is taken to be increased by the amount of tax worked out under subsection (7). Note: Section 371 of the 1936 Act records an amount in an attribution account when the amount is included in the assessable income of an attributable taxpayer in relation to a CFC. Section 605 does the same thing for taxpayers with interests in FIFs. Rules about when foreign tax is considered not paid 770-140 When foreign income tax is considered not paid-anti-avoidance rule Despite anything else in this Division, this Act applies to you as if you had not paid an amount of *foreign income tax to the extent that you or any other entity become entitled to: (a) a refund of the foreign income tax; or (b) any other benefit worked out by reference to the amount of the foreign income tax (other than a reduction in the amount of the foreign income tax). Subdivision 770-D-Administration Table of sections 770-190 Amendment of assessments 770-190 Amendment of assessments (1) Section 170 of the Income Tax Assessment Act 1936 does not prevent the amendment of an assessment for the purpose of giving effect to this Division for an income year if: (a) an event described in subsection (2) (an amendment event) happens after the time you lodged your *income tax return for that year; and (b) the amendment is made at any time during the period of 4 years starting immediately after the amendment event. Note: Section 170 of that Act specifies the periods within which assessments may be amended. (2) The following are amendment events: (a) you pay an amount of *foreign income tax that counts towards your *tax offset for the year; (b) there is an increase in an amount of foreign income tax you paid that counts towards your offset for the year; (c) there is a reduction in an amount of foreign income tax you paid that counts towards your offset for the year. Division 775-Foreign currency gains and losses Table of Subdivisions Guide to Division 775 775-A Objects of this Division 775-B Realisation of forex gains or losses 775-C Roll-over relief for facility agreements 775-D Qualifying forex accounts that pass the limited balance test 775-E Retranslation for qualifying forex accounts 775-F Retranslation under foreign exchange retranslation election under Subdivision 230-D Guide to Division 775 775-5 What this Division is about Your assessable income includes a forex realisation gain you make as a result of a forex realisation event. You can deduct a forex realisation loss that you make as a result of a forex realisation event. There are 5 main types of forex realisation events: (a) forex realisation event 1 happens if you dispose of foreign currency, or a right to receive foreign currency, to another entity; (b) forex realisation event 2 happens if you cease to have a right to receive foreign currency (otherwise than because you disposed of the right to another entity); (c) forex realisation event 3 happens if you cease to have an obligation to receive foreign currency; (d) forex realisation event 4 happens if you cease to have an obligation to pay foreign currency; (e) forex realisation event 5 happens if you cease to have a right to pay foreign currency. There are special rules for certain short-term forex realisation gains and losses. You may choose roll-over relief for certain facility agreements. You may elect to receive concessional tax treatment for a qualifying forex account that passes the limited balance test. You may choose retranslation for a qualifying forex account. Subdivision 775-A-Objects of this Division Table of sections 775-10 Objects of this Division 775-10 Objects of this Division The objects of this Division are as follows: (a) to recognise *foreign currency gains and losses for income tax purposes; (b) to quantify those gains and losses by reference to the change in the Australian dollar value of rights and obligations; (c) to treat certain foreign currency denominated financing facilities that are the economic equivalent of a loan as if the relevant facility were a loan; (d) to reduce compliance costs by not requiring the recognition of certain low-value foreign currency gains and losses that involve substantial calculations. Subdivision 775-B-Realisation of forex gains or losses Table of sections 775-15 Forex realisation gains are assessable 775-20 Certain forex realisation gains are exempt income 775-25 Certain forex realisation gains are non-assessable non- exempt income 775-30 Forex realisation losses are deductible 775-35 Certain forex realisation losses are disregarded 775-40 Disposal of foreign currency or right to receive foreign currency-forex realisation event 1 775-45 Ceasing to have a right to receive foreign currency-forex realisation event 2 775-50 Ceasing to have an obligation to receive foreign currency- forex realisation event 3 775-55 Ceasing to have an obligation to pay foreign currency- forex realisation event 4 775-60 Ceasing to have a right to pay foreign currency-forex realisation event 5 775-65 Only one forex realisation event to be counted 775-70 Tax consequences of certain short-term forex realisation gains 775-75 Tax consequences of certain short-term forex realisation losses 775-80 You may choose not to have sections 775-70 and 775-75 apply to you 775-85 Forex cost base of a right to receive foreign currency 775-90 Forex entitlement base of a right to pay foreign currency 775-95 Proceeds of assuming an obligation to pay foreign currency 775-100 Net costs of assuming an obligation to receive foreign currency 775-105 Currency exchange rate effect 775-110 Constructive receipts and payments 775-115 Economic set-off to be treated as legal set-off 775-120 Non-arm's length transactions 775-125 CGT consequences of the acquisition of foreign currency as a result of forex realisation event 2 or 3 775-130 Certain deductions not allowable 775-135 Right to receive or pay foreign currency 775-140 Obligation to pay or receive foreign currency 775-145 Application of forex realisation events to currency and fungible rights and obligations 775-150 Transitional election 775-155 Applicable commencement date 775-160 Exception-event happens before the applicable commencement date 775-165 Exception-currency or right acquired, or obligation incurred, before the applicable commencement date 775-175 Application to things happening before commencement 775-15 Forex realisation gains are assessable Basic rule (1) Your assessable income for an income year includes a *forex realisation gain you make as a result of a *forex realisation event that happens during that year. Exceptions (2) However, your assessable income does not include a *forex realisation gain to the extent that it: (a) is a gain of a private or domestic nature; and (b) is not covered by an item of the table: |Forex realisation gains to which this subsection does | |not apply | |Item |You make the |happening to...|and the following| | |forex | |condition is | | |realisation | |satisfied... | | |gain as a | | | | |result of this | | | | |event... | | | |1 |forex |*foreign |a gain that would| | |realisation |currency or a |result from the | | |event 1 |right, or a |occurrence of a | | | |part of a |*realisation | | | |right, to |event in relation| | | |receive foreign|to the foreign | | | |currency |currency, or to | | | | |the right, or the| | | | |part of the | | | | |right, would, | | | | |apart from this | | | | |Division, be | | | | |taken into | | | | |account under | | | | |Part 3-1 or 3-3 | |2 |forex |a right, or a |a gain or loss | | |realisation |part of a |that would result| | |event 2 |right, created |from the | | | |or acquired in |occurrence of the| | | |return for the |realisation event| | | |occurrence of a|in relation to | | | |*realisation |the CGT asset | | | |event in |would be taken | | | |relation to a |into account for | | | |*CGT asset you |the purposes of | | | |own, where |Part 3-1 or 3-3 | | | |subparagraph | | | | |775-45(1)(b)(iv| | | | |) applies | | |3 |forex |an obligation, |a gain or loss | | |realisation |or a part of an|that would result| | |event 4 |obligation, you|from the | | | |incurred in |occurrence of a | | | |return for the |*realisation | | | |acquisition of |event in relation| | | |a *CGT asset |to the CGT asset | | | | |would be taken | | | | |into account for | | | | |the purposes of | | | | |Part 3-1 or 3-3 | Note: Parts 3-1 and 3-3 deal with capital gains and losses. (3) Section 775-70 provides for additional exceptions. Note: Section 775-70 is about the tax consequences of certain short-term forex realisation gains. No double taxation (4) To the extent that a *forex realisation gain would be included in your assessable income under this section and another provision of this Act, the gain is only included in your assessable income under this section. Note: Under section 230-20, foreign exchange gains from a Division 230 financial arrangement are dealt with under Division 230 and not under this Division. 775-20 Certain forex realisation gains are exempt income A *forex realisation gain you make is exempt income to the extent that, if it had been a *forex realisation loss, it would have been made in gaining or producing exempt income. 775-25 Certain forex realisation gains are non-assessable non-exempt income A *forex realisation gain you make is non-assessable non-exempt income to the extent that, if it had been a *forex realisation loss, it would have been made in gaining or producing non- assessable non-exempt income. 775-30 Forex realisation losses are deductible Basic rule (1) You can deduct from your assessable income for an income year a *forex realisation loss that you make as a result of a *forex realisation event that happens during that year. Exceptions (2) However, you cannot deduct a *forex realisation loss under this section to the extent that it: (a) is a loss of a private or domestic nature; and (b) is not covered by an item of the table: |Forex realisation losses to which this subsection does| |not apply | |Item |You make the |happening to...|and the following| | |forex | |condition is | | |realisation | |satisfied... | | |loss as a | | | | |result of this | | | | |event... | | | |1 |forex |a right, or a |a gain or loss | | |realisation |part of a |that would result| | |event 2 |right, created |from the | | | |or acquired in |occurrence of the| | | |return for the |realisation event| | | |occurrence of a|in relation to | | | |*realisation |the CGT asset | | | |event in |would be taken | | | |relation to a |into account for | | | |*CGT asset you |the purposes of | | | |own, where |Part 3-1 or 3-3 | | | |subparagraph | | | | |775-45(1)(b)(iv| | | | |) applies | | |2 |forex |an obligation, |a gain or loss | | |realisation |or a part of an|that would result| | |event 4 |obligation, you|from the | | | |incurred in |occurrence of a | | | |return for the |*realisation | | | |acquisition of |event in relation| | | |a *CGT asset |to the CGT asset | | | | |would be taken | | | | |into account for | | | | |the purposes of | | | | |Part 3-1 or 3-3 | Note: Parts 3-1 and 3-3 deal with capital gains and losses. (3) Section 775-75 provides for additional exceptions. Note: Section 775-75 is about the tax consequences of certain short-term forex realisation losses. No double deductions (4) To the extent that this section and another provision of this Act would allow you a deduction for a *forex realisation loss, you can only deduct the loss under this section. Note: Under section 230-20, foreign exchange losses from a Division 230 financial arrangement are dealt with under Division 230 and not under this Division. 775-35 Certain forex realisation losses are disregarded (1) A *forex realisation loss you make as a result of forex realisation event 1, 2 or 5 is disregarded to the extent that it is made in gaining or producing exempt income. (2) A *forex realisation loss you make as a result of forex realisation event 3, 4 or 6 is disregarded to the extent that: (a) it is made in gaining or producing exempt income or non- assessable non-exempt income; and (b) the obligation, or the part of the obligation, does not give rise to a deduction. 775-40 Disposal of foreign currency or right to receive foreign currency- forex realisation event 1 Forex realisation event 1 (1) Forex realisation event 1 is *CGT event A1 that happens if you dispose of: (a) *foreign currency; or (b) a right, or a part of a right, to receive foreign currency. Note: For extended meaning of right to receive foreign currency, see section 775-135. Disposal (2) For the purposes of this section, use subsection 104-10(2) to work out whether you have disposed of: (a) *foreign currency; or (b) a right, or a part of a right, to receive foreign currency. Note: Under subsection 104-10(2), a disposal requires a change of ownership. Time of event (3) For the purposes of this section, subsection 104-10(3) is modified so that the time of the event is when: (a) the *foreign currency is disposed of; or (b) the right, or the part of the right, is disposed of. Forex realisation gain (4) You make a forex realisation gain if: (a) you make a *capital gain from the event; and (b) some or all of the capital gain is attributable to a *currency exchange rate effect. The amount of the forex realisation gain is so much of the capital gain as is attributable to a currency exchange rate effect. Note: For currency exchange rate effect, see section 775-105. (5) For the purposes of paragraph (4)(a), Part 3-1 is modified so that section 118-20 is disregarded in working out the *capital gain. Note: Section 118-20 deals with reducing capital gains if an amount is otherwise assessable. Forex realisation loss (6) You make a forex realisation loss if: (a) you make a *capital loss from the event; and (b) some or all of the capital loss is attributable to a *currency exchange rate effect. The amount of the forex realisation loss is so much of the capital loss as is attributable to a currency exchange rate effect. Note: For currency exchange rate effect, see section 775-105. No indexation of cost base (7) For the purposes of this section, disregard Division 114. Note: Division 114 deals with indexation of the cost base. Foreign currency hedging gains and losses (8) For the purposes of this section, disregard section 118-55. Note: Section 118-55 deals with foreign currency hedging gains and losses. Capital proceeds (9) For the purposes of this section, if the *capital proceeds from the event are more or less than the *market value of: (a) the *foreign currency; or (b) the right, or the part of the right; the capital proceeds from the event are taken to be the market value. (The market value is worked out as at the time of the event.) 775-45 Ceasing to have a right to receive foreign currency-forex realisation event 2 Forex realisation event 2 (1) Forex realisation event 2 happens if: (a) you cease to have a right, or a part of a right, to receive *foreign currency; and (b) the right, or the part of the right, is one of the following: (i) a right, or a part of a right, to receive, or that represents, *ordinary income or *statutory income (other than statutory income that is assessable under this Division or Division 102); (ii) a right, or a part of a right, created or acquired in return for your ceasing to *hold a *depreciating asset; (iii) a right, or a part of a right, created or acquired in return for your paying, or agreeing to pay, an amount of Australian currency or foreign currency; (iv) a right, or a part of a right, created or acquired in return for the occurrence of a *realisation event in relation to a *CGT asset you own, and none of subparagraphs (i), (ii) and (iii) applies; and (c) you did not cease to have the right, or the part of the right, because you disposed of the right or the part of the right (within the meaning of section 775-40). Note 1: Disposals are dealt with by section 775-40 (forex realisation event 1). Note 2: For extended meaning of right to receive foreign currency, see section 775-135. Time of event (2) The time of the event is when you cease to have the right or the part of the right. Forex realisation gain (3) You make a forex realisation gain if: (a) the amount you receive in respect of the event happening exceeds the *forex cost base of the right or the part of the right (the forex cost base is worked out as at the tax recognition time); and (b) some or all of the excess is attributable to a *currency exchange rate effect. The amount of the forex realisation gain is so much of the excess as is attributable to a currency exchange rate effect. Note 1: For forex cost base, see section 775-85. Note 2: For tax recognition time, see subsection (7). Note 3: For currency exchange rate effect, see section 775-105. Forex realisation loss (4) You make a forex realisation loss if: (a) the amount you receive in respect of the event happening falls short of the *forex cost base of the right or the part of the right (the forex cost base is worked out as at the tax recognition time); and (b) some or all of the shortfall is attributable to a *currency exchange rate effect. The amount of the forex realisation loss is so much of the shortfall as is attributable to a currency exchange rate effect. Note 1: For forex cost base, see section 775-85. Note 2: For tax recognition time, see subsection (7). Note 3: For currency exchange rate effect, see section 775-105. (5) You make a forex realisation loss if: (a) the event happens because an option to buy *foreign currency expires without having been exercised, or is cancelled, released or abandoned; and (b) you were capable of exercising the option immediately before the event happened. The amount of the forex realisation loss is the amount you paid in return for the grant or acquisition of the option. Non-cash benefit (6) The amount you receive in respect of the event happening can include a *non-cash benefit. Use the *market value of the benefit to work out the amount you receive. Tax recognition time (7) For the purposes of this section, the tax recognition time is worked out using the table: |Tax recognition time | |Item |If the right, or part of|the tax recognition | | |the right, is... |time is... | |1 |a right, or a part of a |(a) in the case of | | |right, to receive, or |ordinary income-when | | |that represents, |the ordinary income is | | |*ordinary income or |*derived; or | | |*statutory income (other|(b) in the case of | | |than statutory income |statutory income-when | | |that is assessable under|the requirement first | | |this Division or |arose to include the | | |Division 102) |statutory income in | | | |your assessable income.| |2 |a right, or a part of a |when you stop holding | | |right, created or |the asset. | | |acquired in return for | | | |your ceasing to *hold a | | | |*depreciating asset | | |3 |a right, or a part of a |the extension time | | |right, referred to in |referred to in that | | |subsection 775-165(3) |subsection. | | |(which deals with | | | |extensions of loans) | | |4 |a right, or a part of a |when the amount is | | |right, created or |paid. | | |acquired in return for | | | |your paying, or agreeing| | | |to pay, an amount of | | | |Australian currency, | | | |where item 3 does not | | | |apply | | |5 |a right, or a part of a |when the amount is | | |right, created or |paid. | | |acquired in return for | | | |your paying, or agreeing| | | |to pay, an amount of | | | |*foreign currency, where| | | |item 3 does not apply | | |6 |a right, or a part of a |when the realisation | | |right, created in return|event occurs. | | |for the occurrence of a | | | |*realisation event in | | | |relation to a *CGT asset| | | |you own, and none of the| | | |above items apply | | Note: Subsection 775-260(1) modifies the tax recognition time if forex realisation event 2 happens in relation to a qualifying forex account that has ceased to pass the limited balance test. 775-50 Ceasing to have an obligation to receive foreign currency-forex realisation event 3 Forex realisation event 3 (1) Forex realisation event 3 happens if: (a) you cease to have an obligation, or a part of an obligation, to receive *foreign currency; and (b) the obligation, or the part of the obligation, is one of the following: (i) an obligation, or a part of the obligation, incurred in return for the creation or acquisition of a right to pay foreign currency; (ii) an obligation, or a part of the obligation, incurred in return for the creation or acquisition of a right to pay Australian currency. Note 1: For extended meaning of obligation to receive foreign currency, see section 775-140. Note 2: For extended meaning of right to pay foreign currency, see section 775-135. Time of event (2) The time of the event is when you cease to have the obligation or the part of the obligation. Forex realisation gain (3) You make a forex realisation gain if: (a) the amount you receive in respect of the event happening exceeds the net costs of assuming the obligation or the part of the obligation (the net costs are worked out as at the tax recognition time); and (b) some or all of the excess is attributable to a *currency exchange rate effect. The amount of the forex realisation gain is so much of the excess as is attributable to a currency exchange rate effect. Note 1: For net costs of assuming the obligation, see section 775- 100. Note 2: For tax recognition time, see subsection (7). Note 3: For currency exchange rate effect, see section 775-105. (4) You make a forex realisation gain if: (a) the event happens because an option to sell *foreign currency expires without having been exercised, or is cancelled, released or abandoned; and (b) if the option had been exercised immediately before the event, you would have been obliged to buy the foreign currency. The amount of the forex realisation gain is the amount you received in return for granting or assuming obligations under the option. Forex realisation loss (5) You make a forex realisation loss if: (a) the amount you receive in respect of the event happening falls short of the net costs of assuming the obligation or the part of the obligation (the net costs are worked out as at the tax recognition time); and (b) some or all of the shortfall is attributable to a *currency exchange rate effect. The amount of the forex realisation loss is so much of the shortfall as is attributable to a currency exchange rate effect. Note 1: For net costs of assuming the obligation, see section 775- 100. Note 2: For tax recognition time, see subsection (7). Note 3: For currency exchange rate effect, see section 775-105. Non-cash benefit (6) The amount you receive in respect of the event happening can include a *non-cash benefit. Use the *market value of the benefit to work out the amount you receive. Tax recognition time (7) For the purposes of this section, the tax recognition time is the time when you received an amount in respect of the event happening. Right to pay Australian currency (8) To avoid doubt, for the purposes of this section, a right to pay Australian currency includes a right to pay Australian currency, where the right is subject to a contingency. 775-55 Ceasing to have an obligation to pay foreign currency-forex realisation event 4 Forex realisation event 4 (1) Forex realisation event 4 happens if: (a) you cease to have an obligation, or a part of an obligation, to pay *foreign currency; and (b) any of the following applies: (i) the obligation, or the part of the obligation, is an expense or outgoing that you deduct; (ii) the obligation, or the part of the obligation, is an element in the calculation of a net amount included in your assessable income (other than under this Division or Division 102 of this Act or Division 5 or 6 of Part III of the Income Tax Assessment Act 1936); (iii) the obligation, or the part of the obligation, is an element in the calculation of a net amount that is deductible (other than under Division 5 of Part III of the Income Tax Assessment Act 1936); (iv) you incurred the obligation, or the part of the obligation, in return for the acquisition of a *CGT asset; (v) you incurred the obligation, or the part of the obligation, as the second, third, fourth or fifth element of the *cost base of a CGT asset; (vi) you incurred the obligation, or the part of the obligation, in return for your starting to hold a *depreciating asset, and you deduct an amount under Division 40 or 328 for the depreciating asset; (vii) you incurred the obligation, or the part of the obligation, as the second element of the *cost of a depreciating asset, and you deduct an amount under Division 40 or 328 for the depreciating asset; (viii) you incurred the obligation, or the part of the obligation, as a *project amount; (ix) you incurred the obligation, or the part of the obligation, in return for receiving an amount of Australian currency or foreign currency; (x) you incurred the obligation, or the part of the obligation, in return for the creation or acquisition of a right to receive an amount of Australian currency or foreign currency. Note: For extended meaning of obligation to pay foreign currency, see section 775-140. Time of event (2) The time of the event is when you cease to have the obligation or the part of the obligation. Forex realisation gain (3) You make a forex realisation gain if: (a) the amount you paid in respect of the event happening falls short of the proceeds of assuming the obligation or the part of the obligation (the proceeds are worked out as at the tax recognition time); and (b) some or all of the shortfall is attributable to a *currency exchange rate effect. The amount of the forex realisation gain is so much of the shortfall as is attributable to a currency exchange rate effect. Note 1: For proceeds of assuming the obligation, see section 775- 95. Note 2: For tax recognition time, see subsection (7). Note 3: For currency exchange rate effect, see section 775-105. (4) You make a forex realisation gain if: (a) the event happens because an option to sell *foreign currency expires without having been exercised, or is cancelled, released or abandoned; and (b) if the option had been exercised immediately before the event, you would have been obliged to sell the foreign currency. The amount of the forex realisation gain is the amount you received in return for granting or assuming obligations under the option. Forex realisation loss (5) You make a forex realisation loss if: (a) the amount you paid in respect of the event happening exceeds the proceeds of assuming the obligation or the part of the obligation (the proceeds are worked out as at the tax recognition time); and (b) some or all of the excess is attributable to a *currency exchange rate effect. The amount of the forex realisation loss is so much of the excess as is attributable to a currency exchange rate effect. Note 1: For proceeds of assuming the obligation, see section 775- 95. Note 2: For tax recognition time, see subsection (7). Note 3: For currency exchange rate effect, see section 775-105. Non-cash benefit (6) The amount you paid in respect of the event happening can include a *non-cash benefit. Use the *market value of the benefit to work out the amount you paid. Tax recognition time (7) For the purposes of this section, the tax recognition time is worked out using the table: |Tax recognition time | |Item |In this case... |the tax recognition | | | |time is... | |1 |(a) the obligation, or |the time when the | | |the part of the |expense or outgoing | | |obligation, is an |became deductible. | | |expense or outgoing that| | | |you deduct; and | | | |(b) the obligation, or | | | |the part of the | | | |obligation, was not | | | |incurred: | | | |(i) in return for the | | | |acquisition of an item | | | |of *trading stock; or | | | |(ii) in return for your | | | |starting to hold a | | | |*depreciating asset; and| | | | | | | |(c) the obligation, or | | | |the part of the | | | |obligation, was not | | | |incurred as the second | | | |element of the cost of a| | | |depreciating asset | | |2 |(a) the obligation, or |the time when the item | | |the part of the |becomes part of your | | |obligation, is an |trading stock on hand. | | |expense or outgoing that| | | |you deduct; and | | | |(b) the obligation, or | | | |the part of the | | | |obligation, was incurred| | | |in return for the | | | |acquisition of an item | | | |of *trading stock | | |3 |the obligation, or the |the time of the | | |part of the obligation, |determination of the | | |is an element in the |exchange rate used to | | |calculation of a net |translate the element | | |amount included in your |for the purpose of | | |assessable income (other|calculating the net | | |than under this Division|amount. | | |or Division 102 of this | | | |Act or Division 5 or 6 | | | |of Part III of the | | | |Income Tax Assessment | | | |Act 1936) | | |4 |the obligation, or the |the time of the | | |part of the obligation, |determination of the | | |is an element in the |exchange rate used to | | |calculation of a net |translate the element | | |amount that is |for the purpose of | | |deductible (other than |calculating the net | | |under Division 5 of |amount. | | |Part III of the Income | | | |Tax Assessment Act 1936)| | |5 |(a) you incurred the |(a) in the case of the | | |obligation, or the part |acquisition of a | | |of the obligation: |depreciating asset-when| | |(i) in return for your |you began to hold the | | |starting to hold a |depreciating asset | | |*depreciating asset; or |(worked out under | | |(ii) as the second |Division 40); or | | |element of the cost of a|(b) in the case of the | | |depreciating asset; and |second element of the | | |(b) you deduct an amount|cost of a depreciating | | |under Division 40 or 328|asset-when you incurred| | |for the depreciating |the relevant | | |asset |expenditure. | |6 |you incurred the |the first time when any| | |obligation, or the part |part of the amount | | |of the obligation, as a |became deductible. | | |*project amount | | |7 |the obligation, or the |the extension time | | |part of the obligation, |referred to in that | | |is referred to in |subsection. | | |subsection 775-165(5) | | | |(which deals with | | | |extension of loans) | | |8 |you incurred the |the time when you | | |obligation, or the part |received the currency. | | |of the obligation, in | | | |return for: | | | |(a) receiving Australian| | | |currency or *foreign | | | |currency; or | | | |(b) the creation or | | | |acquisition of a right | | | |to receive an amount of | | | |Australian currency or | | | |foreign currency; | | | |where item 7 does not | | | |apply | | |9 |(a) you incurred the |the time when you | | |obligation, or the part |acquired the CGT asset | | |of the obligation, in |(worked out under | | |return for the |Division 109). | | |acquisition of a *CGT | | | |asset; and | | | |(b) none of the above | | | |items apply | | |10 |(a) you incurred the |the time of the | | |obligation, or the part |transaction under which| | |of the obligation, as |you incurred the | | |the second, third, |obligation. | | |fourth or fifth element | | | |of the *cost base of a | | | |CGT asset; and | | | |(b) none of the above | | | |items apply | | Note 1: Foreign currency is a CGT asset. If you acquire foreign currency as the borrower under a loan, item 8 will apply to your obligation to repay the foreign currency borrowed under the loan. Note 2: If you have made a choice for roll-over relief for a facility agreement, and forex realisation event 7 (material variation of a facility agreement) happens, subsection 775- 220(6) modifies the tax recognition time for an obligation under a security that was in existence under the agreement at the time of that event. Note 3: Subsection 775-260(2) modifies the tax recognition time if forex realisation event 4 happens in relation to a qualifying forex account that has ceased to pass the limited balance test. Note 4: If you have made a choice for roll-over relief for a facility agreement, a forex realisation gain or forex realisation loss you make under the agreement as a result of forex realisation event 4 is disregarded-see section 775- 200. 775-60 Ceasing to have a right to pay foreign currency-forex realisation event 5 Forex realisation event 5 (1) Forex realisation event 5 happens if: (a) you cease to have a right, or a part of a right, to pay *foreign currency; and (b) the right, or the part of the right, is one of the following: (i) a right, or a part of a right, created or acquired in return for the assumption of an obligation to pay foreign currency; (ii) a right, or a part of a right, created or acquired in return for the assumption of an obligation to pay Australian currency. Note 1: For extended meaning of right to pay foreign currency, see section 775-135. Note 2: For extended meaning of obligation to pay foreign currency, see section 775-140. Time of event (2) The time of the event is when you cease to have the right or the part of the right. Forex realisation gain (3) You make a forex realisation gain if: (a) the amount you pay in respect of the event happening falls short of the *forex entitlement base of the right or the part of the right (the forex entitlement base is worked out as at the tax recognition time); and (b) some or all of the shortfall is attributable to a *currency exchange rate effect. The amount of the forex realisation gain is so much of the shortfall as is attributable to a currency exchange rate effect. Note 1: For forex entitlement base, see section 775-90. Note 2: For tax recognition time, see subsection (7). Note 3: For currency exchange rate effect, see section 775-105. Forex realisation loss (4) You make a forex realisation loss if: (a) the amount you pay in respect of the event happening exceeds the *forex entitlement base of the right or the part of the right (the forex entitlement base is worked out as at the tax recognition time); and (b) some or all of the excess is attributable to a *currency exchange rate effect. The amount of the forex realisation loss is so much of the excess as is attributable to a currency exchange rate effect. Note 1: For forex entitlement base, see section 775-90. Note 2: For tax recognition time, see subsection (7). Note 3: For currency exchange rate effect, see section 775-105. (5) You make a forex realisation loss if: (a) the event happens because an option to sell *foreign currency expires without having been exercised, or is cancelled, released or abandoned; and (b) you were capable of exercising the option immediately before the event happened. The amount of the forex realisation loss is the amount you paid in return for the grant or acquisition of the option. Non-cash benefit (6) The amount you pay in respect of the event happening can include a *non-cash benefit. Use the *market value of the benefit to work out the amount you pay. Tax recognition time (7) For the purposes of this section, the tax recognition time is the time when you pay an amount in respect of the event happening. Obligation to pay Australian currency (8) To avoid doubt, for the purposes of this section, an obligation to pay Australian currency includes an obligation to pay Australian currency, where the obligation is subject to a contingency. 775-65 Only one forex realisation event to be counted Option to buy foreign currency (1) The following table applies to an option to buy a particular *foreign currency if the exercise price is payable in another foreign currency: |Option to buy foreign currency | |Item |If you are... |and both of |this is the | | | |these events |result... | | | |happen when the | | | | |option is | | | | |exercised... | | |1 |the entity who |(a) forex |ignore forex | | |is capable of |realisation |realisation | | |exercising the |event 1; |event 4. | | |option |(b) forex | | | | |realisation | | | | |event 4 | | |2 |the entity who |(a) forex |ignore forex | | |is capable of |realisation |realisation | | |exercising the |event 2; |event 4. | | |option |(b) forex | | | | |realisation | | | | |event 4 | | |3 |the entity who |(a) forex |ignore forex | | |granted the |realisation |realisation | | |option |event 3; |event 3. | | | |(b) forex | | | | |realisation | | | | |event 4 | | Option to sell foreign currency (2) The following table applies to an option to sell a particular *foreign currency if the exercise price is payable in another foreign currency: |Option to sell foreign currency | |Item |If you are... |and both of |this is the | | | |these events |result... | | | |happen when the | | | | |option is | | | | |exercised... | | |1 |the entity who |(a) forex |ignore forex | | |is capable of |realisation |realisation | | |exercising the |event 3; |event 3. | | |option |(b) forex | | | | |realisation | | | | |event 5 | | |2 |the entity who |(a) forex |ignore forex | | |granted the |realisation |realisation | | |option |event 3; |event 3. | | | |(b) forex | | | | |realisation | | | | |event 4 | | Forward contracts (3) The following table applies to a contract to buy a particular *foreign currency in return for another foreign currency: |Forward contracts | |Item |If both of these events |this is the result... | | |happen when the contract| | | |is carried out... | | |1 |(a) forex realisation |ignore forex realisation| | |event 1; |event 4. | | |(b) forex realisation | | | |event 4 | | |2 |(a) forex realisation |ignore forex realisation| | |event 2; |event 4. | | |(b) forex realisation | | | |event 4 | | Residual rule (4) If: (a) 2 or more of forex realisation events 1, 2, 3, 4 and 5 happen to you at the same time in relation to the same rights and/or obligations; and (b) none of the above subsections applies; apply the forex realisation event that is most appropriate, and ignore the remaining event or events. 775-70 Tax consequences of certain short-term forex realisation gains (1) The following table has effect unless you have made a choice under section 775-80: |Tax consequences of certain short-term forex | |realisation gains | |Item |In this case... |this is the result... | |1 |you make a *forex |(a) the forex realisation | | |realisation gain as a |gain is not included in | | |result of forex |your assessable income | | |realisation event 2, |under section 775-15; and | | |and: |(b) CGT event K10 happens.| | |(a) the right to | | | |receive *foreign | | | |currency was created | | | |in return for the | | | |occurrence of a | | | |*realisation event in | | | |relation to a *CGT | | | |asset you own; and | | | |(b) item 6 of the | | | |table in subsection | | | |775-45(7) applies; and| | | | | | | |(c) the foreign | | | |currency became due | | | |for payment within 12 | | | |months after the | | | |occurrence of the | | | |realisation event | | |2 |you make a *forex |(a) the forex realisation | | |realisation gain as a |gain is not included in | | |result of forex |your assessable income | | |realisation event 4, |under section 775-15; and | | |and: |(b) both the *cost base | | |(a) the obligation to |and the *reduced cost base| | |pay *foreign currency |of the CGT asset are | | |was incurred: |reduced by an amount equal| | |(i) in return for the |to the forex realisation | | |acquisition of a *CGT |gain. | | |asset; or | | | |(ii) as the second, | | | |third, fourth or fifth| | | |element of the *cost | | | |base of a CGT asset; | | | |and | | | |(b) item 9 of the | | | |table in subsection | | | |775-55(7) applies; and| | | | | | | |(c) the foreign | | | |currency became due | | | |for payment within 12 | | | |months after the time | | | |when: | | | |(i) if | | | |subparagraph (a)(i) | | | |applies-you acquired | | | |the CGT asset (worked | | | |out under | | | |Division 109); or | | | |(ii) if | | | |subparagraph (a)(ii) | | | |applies-you incurred | | | |the relevant | | | |expenditure | | |3 |you make a *forex |(a) the forex realisation | | |realisation gain as a |gain is not included in | | |result of forex |your assessable income | | |realisation event 4, |under section 775-15; and | | |and: |(b) if: | | |(a) the obligation to |(i) the forex realisation | | |pay *foreign currency |event happens in the | | |was incurred: |income year in which the | | |(i) in return for your|asset's *start time | | |starting to hold a |occurs; and | | |*depreciating asset; |(ii) the asset is not | | |or |allocated to a pool under | | |(ii) as the second |Subdivision 40-E or 328-D;| | |element of the cost of| | | |a depreciating asset; |the asset's *cost is | | |and |reduced (but not below | | |(b) if |zero) by an amount equal | | |subparagraph (a)(i) |to the forex realisation | | |applies-the foreign |gain; and | | |currency became due |(c) if: | | |for payment within the|(i) the forex realisation | | |24-month period that |event happens in an income| | |began 12 months before|year that is later than | | |the time when you |the one in which the | | |began to hold the |asset's *start time | | |depreciating asset |occurs; and | | |(worked out under |(ii) the asset is not | | |Division 40); and |allocated to a pool under | | |(c) if |Subdivision 40-E or 328-D;| | |subparagraph (a)(ii) | | | |applies-the foreign |the depreciating asset's | | |currency became due |*opening adjustable value | | |for payment within 12 |for the income year in | | |months after the time |which the forex | | |when you incurred the |realisation event happens | | |relevant expenditure |is reduced (but not below | | | |zero) by an amount equal | | | |to the forex realisation | | | |gain; and | | | |(d) if the asset is | | | |allocated to a pool under | | | |Subdivision 40-E or | | | |328-D-the opening pool | | | |balance of the pool for | | | |the income year in which | | | |the forex realisation | | | |event happens is reduced | | | |(but not below zero) by an| | | |amount equal to the forex | | | |realisation gain. | |4 |you make a *forex |(a) the forex realisation | | |realisation gain as a |gain is not included in | | |result of forex |your assessable income | | |realisation event 4, |under section 775-15; and | | |and: |(b) the pool value of the | | |(a) the obligation to |project pool for the | | |pay *foreign currency |income year in which you | | |was incurred as a |incurred the project | | |project amount; and |amount is reduced (but not| | |(b) the foreign |below zero) by an amount | | |currency became due |equal to the forex | | |for payment within 12 |realisation gain. | | |months after the time | | | |when you incurred the | | | |project amount; and | | | |(c) the project amount| | | |is allocated to a | | | |project pool | | Additional result where forex realisation gain exceeds cost etc. (2) The following table has effect: |Additional result where forex realisation gain exceeds | |cost etc. | |Item |If... |and the following |this is the| | | |conditions are |result... | | | |satisfied... | | |1 |item 3 of the|(a) the forex |the excess | | |table in |realisation event |is included| | |subsection (1|happens in the income |in your | | |) applies in |year in which the |assessable | | |relation to a|asset's *start time |income. | | |*depreciating|occurs; and | | | |asset |(b) the asset is not | | | | |allocated to a pool | | | | |under Subdivision 40-E | | | | |or 328-D; and | | | | |(c) the forex | | | | |realisation gain | | | | |exceeds the asset's | | | | |*cost | | |2 |item 3 of the|(a) the forex |the excess | | |table in |realisation event |is included| | |subsection (1|happens in an income |in your | | |) applies in |year that is later than|assessable | | |relation to a|the one in which the |income. | | |*depreciating|asset's *start time | | | |asset |occurs; and | | | | |(b) the asset is not | | | | |allocated to a pool | | | | |under Subdivision 40-E | | | | |or 328-D; and | | | | |(c) the forex | | | | |realisation gain | | | | |exceeds the asset's | | | | |*opening adjustable | | | | |value for the income | | | | |year in which the forex| | | | |realisation event | | | | |happens | | |3 |item 3 of the|(a) the asset is |the excess | | |table in |allocated to a pool |is included| | |subsection (1|under Subdivision 40-E |in your | | |) applies in |or 328-D; and |assessable | | |relation to a|(b) the forex |income. | | |*depreciating|realisation gain | | | |asset |exceeds the opening | | | | |pool balance of the | | | | |pool for the income | | | | |year in which the forex| | | | |realisation event | | | | |happens | | |4 |item 4 of the|the forex realisation |the excess | | |table in |gain exceeds the pool |is included| | |subsection (1|value of the project |in your | | |) applies in |pool for the income |assessable | | |relation to a|year in which you |income. | | |project |incurred the project | | | |amount |amount | | (3) To the extent that a *forex realisation gain: (a) would have been included in your assessable income under section 775-15 if this section had not been enacted; and (b) would, apart from this subsection, be included in your assessable income under another provision of this Act; the gain is not included in your assessable income under that other provision. 775-75 Tax consequences of certain short-term forex realisation losses (1) The following table has effect unless you have made a choice under section 775-80: |Tax consequences of certain short-term forex | |realisation losses | |Item |In this case... |this is the result... | |1 |you make a *forex |(a) the forex | | |realisation loss as a |realisation loss is not| | |result of forex |deductible under | | |realisation event 2, |section 775-30; and | | |and: |(b) CGT event K11 | | |(a) the right to receive|happens. | | |*foreign currency was | | | |created in return for | | | |the occurrence of a | | | |*realisation event in | | | |relation to a *CGT asset| | | |you own; and | | | |(b) item 6 of the table | | | |in subsection 775-45(7) | | | |applies; and | | | |(c) the foreign currency| | | |became due for payment | | | |within 12 months after | | | |the occurrence of the | | | |realisation event | | |2 |you make a *forex |(a) the forex | | |realisation loss as a |realisation loss is not| | |result of forex |deductible under | | |realisation event 4, |section 775-30; and | | |and: |(b) both the *cost base| | |(a) the obligation to |and the *reduced cost | | |pay *foreign currency |base of the CGT asset | | |was incurred: |are increased by an | | |(i) in return for the |amount equal to the | | |acquisition of a *CGT |*forex realisation | | |asset; or |loss. | | |(ii) as the second, | | | |third, fourth or fifth | | | |element of the *cost | | | |base of a CGT asset; and| | | | | | | |(b) item 9 of the table | | | |in subsection 775-55(7) | | | |applies; and | | | |(c) the foreign currency| | | |became due for payment | | | |within 12 months after | | | |the time when: | | | |(i) if | | | |subparagraph (a)(i) | | | |applies-you acquired the| | | |CGT asset (worked out | | | |under Division 109); or | | | |(ii) if | | | |subparagraph (a)(ii) | | | |applies-you incurred the| | | |relevant expenditure | | |3 |you make a *forex |(a) the forex | | |realisation loss as a |realisation loss is not| | |result of forex |deductible under | | |realisation event 4, |section 775-30; and | | |and: |(b) if: | | |(a) the obligation to |(i) the forex | | |pay *foreign currency |realisation event | | |was incurred: |happens in the income | | |(i) in return for your |year in which the | | |starting to hold a |asset's *start time | | |*depreciating asset; or |occurs; and | | |(ii) as the second |(ii) the asset is not | | |element of the cost of a|allocated to a pool | | |depreciating asset; and |under Subdivision 40-E | | |(b) if |or 328-D; | | |subparagraph (a)(i) |the asset's *cost is | | |applies-the foreign |increased by an amount | | |currency became due for |equal to the forex | | |payment within the |realisation loss; and | | |24-month period that |(c) if: | | |began 12 months before |(i) the forex | | |the time when you began |realisation event | | |to hold the depreciating|happens in an income | | |asset (worked out under |year that is later than| | |Division 40); and |the one in which the | | |(c) if |asset's *start time | | |subparagraph (a)(ii) |occurs; and | | |applies-the foreign |(ii) the asset is not | | |currency became due for |allocated to a pool | | |payment within 12 months|under Subdivision 40-E | | |after the time when you |or 328-D; | | |incurred the relevant |the depreciating | | |expenditure |asset's *opening | | | |adjustable value for | | | |the income year in | | | |which the forex | | | |realisation event | | | |happens is increased by| | | |an amount equal to the | | | |forex realisation loss;| | | |and | | | |(d) if the asset is | | | |allocated to a pool | | | |under Subdivision 40-E | | | |or 328-D-the opening | | | |pool balance of the | | | |pool for the income | | | |year in which the forex| | | |realisation event | | | |happens is increased by| | | |an amount equal to the | | | |forex realisation loss.| |4 |you make a *forex |(a) the forex | | |realisation loss as a |realisation loss is not| | |result of forex |deductible under | | |realisation event 4, |section 775-30; and | | |and: |(b) the pool value of | | |(a) the obligation to |the project pool for | | |pay *foreign currency |the income year in | | |was incurred as a |which you incurred the | | |project amount; and |project amount is | | |(b) the foreign currency|increased by an amount | | |became due for payment |equal to the forex | | |within 12 months after |realisation loss. | | |the time when you | | | |incurred the project | | | |amount | | (2) To the extent that: (a) section 775-30 would have allowed you a deduction for a *forex realisation loss if this section had not been enacted; and (b) apart from this subsection, another provision of this Act would allow you a deduction for the loss; you cannot deduct the loss under that other provision. 775-80 You may choose not to have sections 775-70 and 775-75 apply to you (1) You may choose not to have sections 775-70 and 775-75 apply to you. (2) A choice must be in writing. (3) A choice must be made: (a) if you were in existence at the start of the applicable commencement date: (i) within 90 days after the applicable commencement date; or (ii) within 30 days after the commencement of this subsection; or (b) if you came into existence within 90 days after the start of the applicable commencement date: (i) within 90 days after you came into existence; or (ii) within 30 days after the commencement of this subsection; or (c) if the Commissioner allows a longer period-within that longer period. Note: For applicable commencement date, see section 775-155. (4) A choice has effect from the start of the applicable commencement date. (5) A choice may not be revoked. 775-85 Forex cost base of a right to receive foreign currency The forex cost base of a right, or a part of a right, to receive *foreign currency is the total of: (a) the money you: (i) paid; or (ii) are required to pay; or (iii) would be required to pay in the event of the exercise of an option; in respect of acquiring the right or part of the right; and (b) the *market value of any *non-cash benefit you: (i) provided; or (ii) are required to provide; or (iii) would be required to provide in the event of the exercise of an option; in respect of acquiring the right or part of the right; reduced by any amounts that are deductible under a provision of this Act other than this Division. 775-90 Forex entitlement base of a right to pay foreign currency The forex entitlement base of a right, or a part of a right, to pay *foreign currency is the total of: (a) the money you: (i) are entitled to receive; or (ii) would be entitled to receive in the event of the exercise of an option; in respect of the discharge or satisfaction of the right or the part of the right; and (b) the *market value of any *non-cash benefit you: (i) are entitled to acquire or obtain; or (ii) would be entitled to acquire or obtain in the event of the exercise of an option; in respect of the discharge or satisfaction of the right or the part of the right; reduced by: (c) any amounts that you paid to acquire the right or the part of the right, where the amounts are not deductible under a provision of this Act other than this Division; and (d) the market value of any non-cash benefit that you provided to acquire the right or the part of the right, where the market value is not deductible under a provision of this Act other than this Division. 775-95 Proceeds of assuming an obligation to pay foreign currency For the purposes of this Division, the proceeds of assuming an obligation, or a part of an obligation, to pay *foreign currency are the total of: (a) the money you: (i) received; or (ii) are entitled to receive; or (iii) would be entitled to receive in the event of the exercise of an option; in return for incurring the obligation or the part of the obligation; and (b) the *market value of any *non-cash benefit you: (i) acquired or obtained; or (ii) are entitled to acquire or obtain; or (iii) would be entitled to acquire or obtain in the event of the exercise of an option; in return for incurring the obligation or the part of the obligation; reduced by any amounts that are included in assessable income under a provision of this Act other than this Division. 775-100 Net costs of assuming an obligation to receive foreign currency (1) For the purposes of this Division, the net costs of assuming an obligation, or a part of an obligation, to receive *foreign currency are the total of: (a) the money you: (i) are required to pay; or (ii) would be required to pay in the event of the exercise of an option; in respect of the fulfilment of the obligation or the part of the obligation; and (b) the *market value of any *non-cash benefit you: (i) are required to provide; or (ii) would be required to provide in the event of the exercise of an option; in respect of the fulfilment of the obligation or the part of the obligation; reduced by the amount worked out under subsection (2). (2) The amount worked out under this subsection is the total of: (a) the money you: (i) received; or (ii) are entitled to receive; because you incurred the obligation or the part of the obligation; and (b) the *market value of any *non-cash benefit you: (i) received or obtained; or (ii) are entitled to receive or obtain; because you incurred the obligation or the part of the obligation; reduced by any amounts that are included in assessable income under a provision of this Act other than this Division. (3) To avoid doubt, paragraphs (2)(a) and (b) do not apply to money or a *non-cash benefit that you: (a) received or obtained; or (b) are entitled to receive or obtain; because of the fulfilment of the obligation or the part of the obligation. 775-105 Currency exchange rate effect (1) A currency exchange rate effect is: (a) any currency exchange rate fluctuations; or (b) a difference between: (i) an expressly or implicitly agreed currency exchange rate for a future date or time; and (ii) the applicable currency exchange rate at that date or time. (2) To work out whether there is a currency exchange rate effect and (if so), the extent of that effect, use whichever of the following translation rules is applicable to you: (a) the translation rules in section 960-50 (the standard rules); (b) the translation rules in section 960-80 (the functional currency rules). 775-110 Constructive receipts and payments For the purposes of this Subdivision, if an entity (the payer) did not actually pay an amount to another entity (the recipient), but the amount was applied or dealt with in any way on the recipient's behalf or as the recipient directs (including by discharging all or a part of an obligation owed by the recipient), then: (a) the payer is taken to have paid the amount as soon as it is applied or dealt with; and (b) the recipient is taken to have received the amount as soon as it is applied or dealt with. Note: The set-off of an obligation to pay an amount against a right to receive an amount is an example of how this section would operate. 775-115 Economic set-off to be treated as legal set-off If the economic effect of an *arrangement is to provide for the set-off, in whole or in part, of one or more amounts against one or more other amounts, this Subdivision applies as if: (a) the parties to the arrangement had the respective rights and obligations that they would have had if the provision for economic set-off were structured as a provision for legal set- off of rights and obligations; and (b) if the economic set-off happens-the parties were taken, under section 775-110, to have paid and received the respective amounts that they would have paid and received if the economic set-off were structured as a legal set-off of rights and obligations. 775-120 Non-arm's length transactions If: (a) you and another entity did not deal with each other at arm's length in connection with a transaction that is relevant to working out: (i) whether you make a *forex realisation gain or a *forex realisation loss; or (ii) the amount of any *forex realisation gain or a *forex realisation loss made by you; and (b) apart from this section, a particular amount is more or less than it would have been if you and the other entity had been dealing with each other at arm's length; this Subdivision applies to you as if that amount were the amount it would have been if you and the other entity had been dealing with each other at arm's length. 775-125 CGT consequences of the acquisition of foreign currency as a result of forex realisation event 2 or 3 If you acquire *foreign currency as a result of forex realisation event 2 or 3: (a) the first element of the foreign currency's *cost base is replaced by the foreign currency's *market value at the time you received the foreign currency; and (b) the first element of the foreign currency's *reduced cost base is replaced by the foreign currency's market value at the time you received the foreign currency. 775-130 Certain deductions not allowable If: (a) an amount is included in your assessable income under this Division; and (b) if this Division had not been enacted, the amount would not have been included in your assessable income under any other provision of this Act (other than Division 102); and (c) if this section had not been enacted, a deduction would be allowable to you under a provision listed in the table in subsection 51AAA(2) of the Income Tax Assessment Act 1936; and (d) if the amount had not been included in your assessable income under this Division, the deduction would not be allowable; the deduction is not allowable. 775-135 Right to receive or pay foreign currency Extended meaning of right to receive foreign currency (1) For the purposes of this Division, a right to receive foreign currency includes a right to receive an amount calculated by reference to a currency exchange rate effect, even if that amount is not an amount of *foreign currency. (2) To avoid doubt, for the purposes of this Division, a right to receive foreign currency includes a right to receive *foreign currency, where the right is subject to a contingency. Extended meaning of right to pay foreign currency (3) For the purposes of this Division, a right to pay foreign currency includes a right to pay an amount calculated by reference to a currency exchange rate effect, even if that amount is not an amount of *foreign currency. (4) To avoid doubt, for the purposes of this Division, a right to pay foreign currency includes a right to pay *foreign currency, where the right is subject to a contingency. 775-140 Obligation to pay or receive foreign currency Extended meaning of obligation to pay foreign currency (1) For the purposes of this Division, an obligation to pay foreign currency includes an obligation to pay an amount calculated by reference to a currency exchange rate effect, even if that amount is not an amount of *foreign currency. (2) To avoid doubt, for the purposes of this Division, an obligation to pay foreign currency includes an obligation to pay *foreign currency, where the obligation is subject to a contingency. Extended meaning of obligation to receive foreign currency (3) For the purposes of this Division, an obligation to receive foreign currency includes an obligation to receive an amount calculated by reference to a currency exchange rate effect, even if that amount is not an amount of *foreign currency. (4) To avoid doubt, for the purposes of this Division, an obligation to receive foreign currency includes an obligation to receive *foreign currency, where the obligation is subject to a contingency. 775-145 Application of forex realisation events to currency and fungible rights and obligations (1) Forex realisation event 1, 2 or 4 applies in relation to: (a) *foreign currency; or (b) a fungible right, or a part of a fungible right, to receive foreign currency; or (c) a fungible obligation, or a part of a fungible obligation, to pay foreign currency; on a first-in first-out basis. (2) The regulations may provide that any or all of forex realisation events 1, 2 and 4 apply, or apply in specified circumstances, to: (a) *foreign currency; or (b) a fungible right, or a part of a fungible right, to receive foreign currency; or (c) a fungible obligation, or a part of a fungible obligation, to pay foreign currency; on a weighted average basis (despite subsection (1)). (3) The circumstances that may be specified for the purposes of subsection (2) include the circumstance that you have made an election to use a weighted average basis. (4) Subsection (3) does not limit subsection (2). 775-150 Transitional election (1) You may elect to have this section apply to you. Note: For the consequences of an election, see sections 775-160 and 775-165. (2) An election must be in writing. (3) An election must be made: (a) within 60 days after the applicable commencement date; or (b) within 30 days after the commencement of this subsection. Note: For applicable commencement date, see section 775-155. (4) An election may not be revoked. 775-155 Applicable commencement date For the purposes of this Division, your applicable commencement date is: (a) the first day of the 2003-04 income year; or (b) if that day is earlier than 1 July 2003-the first day of the 2004-05 income year. 775-160 Exception-event happens before the applicable commencement date (1) A *forex realisation gain or *forex realisation loss you make as a result of forex realisation event 1, 2, 3, 4 or 5 is disregarded if the event happened before the applicable commencement date. Note: For applicable commencement date, see section 775-155. (2) Subsection (1) does not apply if: (a) you have made an election under section 775-150; and (b) the Commissioner is satisfied that the event happened under, or as a result of, an *arrangement that was entered into or carried out for the purpose, or for purposes that included the purpose, of obtaining the benefit of the operation of subsection (1). 775-165 Exception-currency or right acquired, or obligation incurred, before the applicable commencement date Exception-foreign currency acquired before the applicable commencement date (1) A *forex realisation gain or *forex realisation loss you make on the disposal of *foreign currency as a result of forex realisation event 1 is disregarded if: (a) the foreign currency was acquired before the applicable commencement date; and (b) you have not made an election under section 775-150. For the purposes of paragraph (a), the time of acquisition is worked out under Division 109. Note: For applicable commencement date, see section 775-155. Exception-right acquired before the applicable commencement date (2) A *forex realisation gain or *forex realisation loss you make as a result of forex realisation event 1, 2 or 5 happening to a right or a part of a right is disregarded if: (a) the right, or the part of the right; (i) was acquired before the applicable commencement date; or (ii) arose under an eligible contract (within the meaning of the former Division 3B of Part III of the Income Tax Assessment Act 1936) that was entered into before the applicable commencement date; and (b) you have not made an election under section 775-150. For the purposes of subparagraph (a)(i), the time of acquisition is worked out under Division 109. Note: For applicable commencement date, see section 775-155. (3) If: (a) at a particular time (the extension time) on or after the applicable commencement date and under a contract that was entered into before the applicable commencement date, the period for which money has been lent is extended; and (b) either: (i) the contract is separate from the original loan contract; or (ii) the extension amounts to a variation of the original loan contract; subparagraph (2)(a)(ii) does not apply to a right, or a part of a right, that arises after the extension time and relates to the loan. Note: For applicable commencement date, see section 775-155. Exception-obligation incurred before the applicable commencement date (4) A *forex realisation gain or *forex realisation loss you make as a result of forex realisation event 3 or 4 happening to an obligation or a part of an obligation is disregarded if: (a) either: (i) you incurred the obligation, or the part of the obligation, before the applicable commencement date; or (ii) the obligation, or the part of the obligation, arose under an eligible contract (within the meaning of the former Division 3B of Part III of the Income Tax Assessment Act 1936) that was entered into before the applicable commencement date; and (b) you have not made an election under section 775-150. Note: For applicable commencement date, see section 775-155. (5) If: (a) at a particular time (the extension time) on or after the applicable commencement date and under a contract that was entered into before the applicable commencement date, the period for which money has been lent is extended; and (b) either: (i) the contract is separate from the original loan contract; or (ii) the extension amounts to a variation of the original loan contract; subparagraph (4)(a)(ii) does not apply to an obligation, or a part of an obligation, that arises after the extension time and relates to the loan. Note: For applicable commencement date, see section 775-155. 775-175 Application to things happening before commencement The use of the present tense in a provision of this Division does not imply that the provision does not apply to things happening before the commencement of this Division. Subdivision 775-C-Roll-over relief for facility agreements Guide to Subdivision 775-C 775-180 What this Subdivision is about A facility agreement is an agreement where: (a) you have a right to issue eligible securities and another entity or entities must acquire the securities; and (b) the economic effect of the agreement is to enable you to obtain finance in a particular foreign currency. If you choose roll-over relief for a facility agreement: (a) a forex realisation gain or a forex realisation loss you make as a result of forex realisation event 4 is disregarded if the event happens because you discharge your obligation under an eligible security issued by you under the agreement; and (b) if you issue an eligible security under the agreement otherwise than as a result of a roll-over-you are taken to have been given a loan (the notional loan); and (c) if an eligible security is rolled-over under the agreement- the period of the notional loan is extended by the term of the new security; and (d) forex realisation event 6 happens if you discharge your obligation under the notional loan; and (e) forex realisation event 7 happens if a material variation is made to the agreement. Table of sections Operative provisions 775-185 What is a facility agreement? 775-190 What is an eligible security? 775-195 You may choose roll-over relief for a facility agreement 775-200 Forex realisation event 4 does not apply 775-205 What is a roll-over? 775-210 Notional loan 775-215 Discharge of obligation to pay the principal amount of a notional loan under a facility agreement-forex realisation event 6 775-220 Material variation of a facility agreement-forex realisation event 7 Operative provisions 775-185 What is a facility agreement? A facility agreement is an agreement between an entity (the first entity) and another entity or entities under which: (a) the first entity has a right to issue *eligible securities; and (b) an entity or entities must acquire the securities; where the economic effect of the agreement is to enable the first entity to obtain finance in a particular *foreign currency: (c) up to the foreign currency amount specified in the agreement; and (d) during the term of the agreement. 775-190 What is an eligible security? An eligible security is: (a) a bill of exchange, or a promissory note, that is: (i) non-interest bearing; and (ii) issued at a discount to face value; and (iii) denominated in a particular *foreign currency; and (iv) for a fixed term; or (b) a security that is: (i) specified in the regulations; and (ii) denominated in a foreign currency; and (iii) for a fixed term. 775-195 You may choose roll-over relief for a facility agreement (1) You may choose roll-over relief for a *facility agreement if: (a) you have entered into the agreement; and (b) you have a right to issue *eligible securities under the agreement; and (c) the economic effect of the agreement is to enable you to obtain finance in a particular *foreign currency: (i) up to the foreign currency amount specified in the agreement; and (ii) during the term of the agreement. (2) A choice must be made: (a) within 90 days after the first time you issue an *eligible security under the *facility agreement; or (b) within 90 days after the applicable commencement date; or (c) within 30 days after the commencement of this subsection. Note: For applicable commencement date, see section 775-155. (3) If you make a choice within 90 days after the first time you issue an *eligible security under the *facility agreement, the choice is taken to have been in effect throughout the period that began immediately before the first time you issued an eligible security under the facility agreement. (4) If: (a) you make a choice: (i) within 90 days after the applicable commencement date; or (ii) within 30 days after the commencement of this subsection; and (b) subsection (3) does not apply; the choice is taken to have been in effect throughout the period that began at whichever is the later of the following times: (c) the start of the applicable commencement date; (d) the first time you issued an *eligible security under the *facility agreement. Note: For applicable commencement date, see section 775-155. (5) A choice must be in writing. (6) A choice continues to apply until the *facility agreement ends. Note: If forex realisation event 7 happens (material variation of facility agreement), subsection 775-220(5) terminates your choice. (7) A choice may not be revoked. 775-200 Forex realisation event 4 does not apply A *forex realisation gain or a *forex realisation loss you make as a result of forex realisation event 4 or 9 is disregarded to the extent to which the event happens because: (a) you discharge your obligation under an *eligible security issued by you under a *facility agreement; and (b) you have made a choice for roll-over relief for the facility agreement, and that choice is in effect. 775-205 What is a roll-over? A roll-over happens under a *facility agreement if: (a) you discharge your obligation under an *eligible security issued by you under the agreement (the rolled-over security); and (b) at the same time, you issue a new eligible security (the new security) under the agreement; and (c) the issue of the new security is related to the discharge of your obligation under the rolled-over security in one of the following ways: (i) your obligation under the rolled-over security is wholly or partly set-off against your right to receive the *foreign currency issue price of the new security; (ii) your obligation under the rolled-over security is wholly or partly satisfied by the issue of the new security; and (d) you have made a choice for roll-over relief for the agreement, and that choice is in effect; and (e) the new security is issued on or after the applicable commencement date; and (f) if you have not made an election under section 775-150-the rolled-over security is issued on or after the applicable commencement date. Note: For applicable commencement date, see section 775-155. 775-210 Notional loan (1) The rules in this section have effect only for the purposes of this Subdivision. Notional loan (2) If you issue an *eligible security under a *facility agreement otherwise than as a result of a roll-over, you are taken to have been given a loan (the notional loan): (a) of a *foreign currency principal amount equal to the foreign currency face value of the security; and (b) for a period equal to the term of the security; and (c) that is taken to be attached to the security; and (d) the start time of which is the time when you issued the security. Note 1: The period of the notional loan may be extended as the result of a later roll-over-see subsection (3). Note 2: The notional loan may become attached to a later security as the result of a roll-over-see subsection (3). Note 3: The foreign currency principal amount of the notional loan may remain the same, or may fall (but not rise), as a result of a later roll-over-see subsection (3). Note 4: If, at a later time, the security is rolled-over, and the foreign currency face value of the new security exceeds the foreign currency face value of the rolled-over security, you are taken to have been given an additional notional loan of a foreign currency principal amount equal to the excess-see subsection (3). Effect of roll-over (3) The table has effect if an *eligible security is rolled-over under a *facility agreement: |Roll-over of eligible security | |Item |If the foreign |this is the result... | | |currency face value| | | |of the new | | | |security... | | |1 |equals the *foreign|(a) the period of each | | |currency face value|notional loan attached to | | |of the rolled-over |the rolled-over security is | | |security |extended by the term of the | | | |new security; and | | | |(b) each notional loan | | | |attached to the rolled-over | | | |security is taken to be | | | |attached to the new | | | |security. | |2 |exceeds the |(a) you are taken to have | | |*foreign currency |been given an additional | | |face value of the |notional loan: | | |rolled-over |(i) of a foreign currency | | |security |principal amount equal to | | | |the excess; and | | | |(ii) for a period equal to | | | |the term of the new | | | |security; and | | | |(iii) that is taken to be | | | |attached to the new | | | |security; and | | | |(iv) the start time of which| | | |is the time when you issued | | | |the new security; and | | | |(b) the period of each | | | |notional loan attached to | | | |the rolled-over security is | | | |extended by the term of the | | | |new security; and | | | |(c) each notional loan | | | |attached to the rolled-over | | | |security is taken to be | | | |attached to the new | | | |security. | |3 |falls short of the |(a) you are taken to have | | |*foreign currency |paid a foreign currency | | |face value of the |amount equal to the | | |rolled-over |shortfall in order to | | |security, and there|discharge so much of your | | |is only one |obligation to pay the | | |notional loan |foreign currency principal | | |attached to the |amount of the notional loan | | |rolled-over |as equals the shortfall; and| | |security | | | | |(b) the period of the | | | |notional loan is extended by| | | |the term of the new | | | |security; and | | | |(c) the notional loan is | | | |taken to be attached to the | | | |new security. | |4 |falls short of the |(a) you are taken to have | | |*foreign currency |paid a foreign currency | | |face value of the |amount equal to the | | |rolled-over |shortfall in order to | | |security, and there|discharge your obligation to| | |are 2 or more |pay so much of the total | | |notional loans |foreign currency principal | | |attached to the |amounts of the notional | | |rolled-over |loans as equals the | | |security |shortfall, and to have done | | | |so on a first-in first-out | | | |basis, that is to say: | | | |(i) first, by fully or | | | |partly discharging (as the | | | |case requires) your | | | |obligation to pay the | | | |foreign currency principal | | | |amount of the notional loan | | | |with the earliest start | | | |date; and | | | |(ii) second, if your | | | |obligation to pay the | | | |foreign currency principal | | | |amount of the notional loan | | | |with the earliest start date| | | |is fully discharged-by fully| | | |or partly discharging (as | | | |the case requires) your | | | |obligation to pay the | | | |foreign currency principal | | | |amount of the notional loan | | | |with the next start date, | | | |and so on; and | | | |(b) the period of each | | | |notional loan attached to | | | |the rolled-over security | | | |that is not fully discharged| | | |is extended by the term of | | | |the new security; and | | | |(c) each notional loan | | | |attached to the rolled-over | | | |security that is not fully | | | |discharged is taken to be | | | |attached to the new | | | |security. | Consequences if security is not rolled-over (4) If: (a) you discharge your obligation under an *eligible security issued under a *facility agreement; and (b) the security is not rolled-over at the time of discharge; and (c) you have made a choice for roll-over relief for the facility agreement, and that choice is in effect; then, for each notional loan attached to the security, you are taken to have paid a *foreign currency amount equal to the foreign currency principal amount of the notional loan in order to discharge your obligation to pay the foreign currency principal amount of the notional loan. Foreign currency (5) For the purposes of the application of this section to a particular *facility agreement that provides for the issue of *eligible securities, foreign currency is the *foreign currency in which the securities are denominated. Note: Section 960-50 (Australian currency translation rule) does not affect the operation of this section-see subsection 960- 50(10). You translate to Australian currency when you apply section 775-215 (forex realisation event 6). 775-215 Discharge of obligation to pay the principal amount of a notional loan under a facility agreement-forex realisation event 6 Forex realisation event 6 (1) Forex realisation event 6 happens if: (a) you discharge an obligation, or a part of an obligation, to pay the *foreign currency principal amount of a notional loan attached to an *eligible security issued by you under a *facility agreement; and (b) you have made a choice for roll-over relief for the agreement, and that choice is in effect. Time of event (2) The time of the event is when you discharge the obligation or the part of the obligation. Forex realisation gain (3) You make a forex realisation gain if: (a) the amount of the obligation, or the part of the obligation, at the start time of the notional loan, exceeds the amount you paid in order to discharge the obligation or the part of the obligation; and (b) some or all of the excess is attributable to a *currency exchange rate effect. The amount of the forex realisation gain is so much of the excess as is attributable to a currency exchange rate effect. Note: For currency exchange rate effect, see section 775-105. Forex realisation loss (4) You make a forex realisation loss if: (a) the amount of the obligation, or the part of the obligation, at the start time of the notional loan, falls short of the amount you paid in order to discharge the obligation or the part of the obligation; and (b) some or all of the shortfall is attributable to a *currency exchange rate effect. The amount of the forex realisation loss is so much of the shortfall as is attributable to a currency exchange rate effect. Note: For currency exchange rate effect, see section 775-105. Exempt income etc. (5) For the purposes of the application of sections 775-20, 775-25 and 775-35 to the event, assume that the notional loan had been an actual loan. 775-220 Material variation of a facility agreement-forex realisation event 7 Forex realisation event 7 (1) Forex realisation event 7 happens if: (a) a material variation is made to the terms or conditions of a *facility agreement; or (b) a material variation is made to the effect of a facility agreement; or (c) a material variation is made to the type or types of security that can be issued under a facility agreement; so long as you have made a choice for roll-over relief for the facility agreement, and that choice is in effect. Note: See also subsections (7) and (8). Time of the event (2) The time of the event is when the material variation happens. Forex realisation gain (3) You make a forex realisation gain if: (a) the total of the forex realisation gains that you would have made as a result of forex realisation event 6 if you had, at the time of forex realisation event 7: (i) discharged your liabilities under each of the notional loans to which the agreement relates; and (ii) not rolled-over any *eligible security; exceeds: (b) the total of the forex realisation losses that you would have made as a result of forex realisation event 6 if you had, at the time of forex realisation event 7: (i) discharged your liabilities under each of the notional loans to which the agreement relates; and (ii) not rolled-over any eligible security. The amount of the forex realisation gain is the amount of the excess. Note: See also subsection (9). Forex realisation loss (4) You make a forex realisation loss if: (a) the total of the forex realisation losses that you would have made as a result of forex realisation event 6 if you had, at the time of forex realisation event 7: (i) discharged your liabilities under each of the notional loans to which the agreement relates; and (ii) not rolled-over any *eligible security; exceeds: (b) the total of the forex realisation gains that you would have made as a result of forex realisation event 6 if you had, at the time of forex realisation event 7: (i) discharged your liabilities under each of the notional loans to which the agreement relates; and (ii) not rolled-over any eligible security. The amount of the forex realisation loss is the amount of the excess. Note: See also subsection (9). Termination of choice (5) If forex realisation event 7 happens in relation to a *facility agreement: (a) your choice for roll-over relief for the facility agreement ceases to have effect immediately after the event; and (b) you are not entitled to make a fresh choice for roll-over relief for the facility agreement. Modification of tax recognition time (6) If: (a) forex realisation event 7 happens in relation to a *facility agreement; and (b) an *eligible security issued by you under the facility agreement was in existence at the time of that event; and (c) at a later time, forex realisation event 4 happens because you cease to have an obligation, or a part of an obligation, to pay *foreign currency under the security; section 775-55 applies to you as if the tax recognition time for the obligation, or the part of the obligation, were the time of forex realisation event 7 (despite subsection 775-55(7)). Material variation (7) To avoid doubt, if a variation to: (a) the terms or conditions of a facility agreement; or (b) the effect of a facility agreement; results in the agreement ceasing to be a facility agreement, the variation is taken to be a material variation for the purposes of subsection (1). (8) The regulations may provide that a specified kind of variation is taken to be a material variation for the purposes of subsection (1). Total amount (9) To avoid doubt, the total amount referred to in paragraph (3)(b) or (4)(b) may be zero. Subdivision 775-D-Qualifying forex accounts that pass the limited balance test Guide to Subdivision 775-D 775-225 What this Subdivision is about You may elect to have this Subdivision apply to one or more qualifying forex accounts held by you. If you elect to have this Subdivision apply to an account, a forex realisation gain or a forex realisation loss you make in relation to the account as a result of forex realisation event 2 or 4 is disregarded if the account passes the limited balance test. For an account to pass the limited balance test, the combined balance of all the accounts covered by your election must not be more than the foreign currency equivalent of $250,000. The limited balance test includes a buffer provision which allows the combined balance to be more than the foreign currency equivalent of $250,000, but not more than the foreign currency equivalent of $500,000, for not more than 2 15-day periods in any income year. Table of sections Operative provisions 775-230 Election to have this Subdivision apply to one or more qualifying forex accounts 775-235 Variation of election 775-240 Withdrawal of election 775-245 When does a qualifying forex account pass the limited balance test? 775-250 Tax consequences of passing the limited balance test 775-255 Notional realisation when qualifying forex account starts to pass the limited balance test 775-260 Modification of tax recognition time Operative provisions 775-230 Election to have this Subdivision apply to one or more qualifying forex accounts (1) You may elect to have this Subdivision apply to one or more *qualifying forex accounts held by you. (2) An election must be in writing. (2A) If: (a) you make an election within 30 days after the commencement of this subsection; and (b) the election is expressed to have come into effect on a specified day; and (c) the specified day is included in the period: (i) beginning on 1 July 2003; and (ii) ending on the day on which the election is made; the election is taken to have come into effect on the specified day. (3) An election continues in effect, in relation to a particular account, until: (a) you cease to hold the account; or (b) the account ceases to be a *qualifying forex account; or (c) the election is varied by removing the account; or (d) a withdrawal of the election takes effect; whichever happens first. Note 1: For variation of election, see section 775-235. Note 2: For withdrawal of election, see section 775-240. (4) If an election made by you under this section is in effect, you are not entitled to make another election under this section. (5) An *ADI or a *non-ADI financial institution is not entitled to make an election under this section. 775-235 Variation of election (1) If you have made an election under section 775-230, you may vary your election by: (a) adding one or more *qualifying forex accounts; or (b) removing one or more qualifying forex accounts. (2) A variation must be in writing. (3) Removing an account does not prevent you from adding the account in a future variation. 775-240 Withdrawal of election (1) If you have made an election under section 775-230, you may withdraw your election. (2) A withdrawal must be in writing. (3) Withdrawing an election does not prevent you from making a fresh election under section 775-230 in relation to any or all of the same accounts. 775-245 When does a qualifying forex account pass the limited balance test? Basic rule (1) For the purposes of this Subdivision, a *qualifying forex account that you hold passes the limited balance test at a particular time if, at that time: (a) an election made by you under section 775-230 has effect in relation to: (i) the account; or (ii) the account and one or more other *qualifying forex accounts; and (b) the total of the credit balances of the account and each of those other accounts (if any) is not more than the *foreign currency equivalent of $250,000; and (c) the total of the debit balances of the account and each of those other accounts (if any) is not more than the foreign currency equivalent of $250,000. Note: For buffering during an increased balance period, see subsections (2) and (3). Buffering during first and second increased balance period (2) For the purposes of this section, an increased balance period is a continuous period consisting of: (a) an income year; or (b) a particular part of an income year; where, at each time during the period, either or both of the following conditions is satisfied: (c) the total of the credit balances of the account or accounts covered by your section 775-230 election is more than the *foreign currency equivalent of $250,000, but not more than the foreign currency equivalent of $500,000; (d) the total of the debit balances of the account or accounts covered by your section 775-230 election is more than the foreign currency equivalent of $250,000, but not more than the foreign currency equivalent of $500,000. (3) The table has effect: |Increased balance period | |Item |In this case... |this is the result... | |1 |(a) an increased balance|paragraphs (1)(b) and | | |period is the first or |(c) do not apply during | | |only increased balance |the first-mentioned | | |period that occurs in a |increased balance | | |particular income year; |period. | | |and | | | |(b) the duration of the | | | |period is 15 days or | | | |less; and | | | |(c) it is not the case | | | |that: | | | |(i) the period began at | | | |the start of the income | | | |year; and | | | |(ii) another increased | | | |balance period ended at | | | |the end of the previous | | | |income year | | |2 |(a) an increased balance|paragraphs (1)(b) and | | |period is the first or |(c) do not apply during | | |only increased balance |those increased balance | | |period that occurs in a |periods. | | |particular income year; | | | |and | | | |(b) both: | | | |(i) the period began at | | | |the start of the income | | | |year; and | | | |(ii) another increased | | | |balance period ended at | | | |the end of the previous | | | |income year; and | | | |(c) the total duration | | | |of those increased | | | |balance periods is 15 | | | |days or less | | |3 |(a) an increased balance|paragraphs (1)(b) and | | |period is the first or |(c) do not apply during | | |only increased balance |the first 15 days of the| | |period that occurs in a |first-mentioned | | |particular income year; |increased balance | | |and |period. | | |(b) the duration of the | | | |period is more than 15 | | | |days; and | | | |(c) it is not the case | | | |that: | | | |(i) the period began at | | | |the start of the income | | | |year; and | | | |(ii) another increased | | | |balance period ended at | | | |the end of the previous | | | |income year | | |4 |(a) an increased balance|paragraphs (1)(b) and | | |period is the first or |(c) do not apply during | | |only increased balance |the first 15 days of the| | |period that occurs in a |period that consists of | | |particular income year; |those increased balance | | |and |periods. | | |(b) both: | | | |(i) the period began at | | | |the start of the income | | | |year; and | | | |(ii) another increased | | | |balance period ended at | | | |the end of the previous | | | |income year; and | | | |(c) the total duration | | | |of those increased | | | |balance periods is more | | | |than 15 days | | |5 |(a) an increased balance|paragraphs (1)(b) and | | |period is the second |(c) do not apply during | | |increased balance period|the first-mentioned | | |that occurs in a |increased balance | | |particular income year; |period. | | |and | | | |(b) the duration of the | | | |period is 15 days or | | | |less; and | | | |(c) item 1 or 2 applies | | | |to the first increased | | | |balance period that | | | |occurred in the income | | | |year | | |6 |(a) an increased balance|paragraphs (1)(b) and | | |period is the second |(c) do not apply during | | |increased balance period|the first 15 days of the| | |that occurs in a |first-mentioned | | |particular income year; |increased balance | | |and |period. | | |(b) the duration of the | | | |period is more than 15 | | | |days; and | | | |(c) item 1 or 2 applies | | | |to the first increased | | | |balance period that | | | |occurred in the income | | | |year | | Translation of foreign currency (4) For the purposes of the application of section 960-50 to this section, work out the *foreign currency equivalent of an amount of Australian currency as at a particular time in an income year by translating the foreign currency to Australian currency at the average exchange rate for the third month that preceded the income year. Debit balances (5) For the purposes of this section, a debit balance is to be expressed as a positive amount. Note: For example, if you owe $1,100 on a credit card account, the debit balance of that account is $1,100. 775-250 Tax consequences of passing the limited balance test (1) A *forex realisation gain or a *forex realisation loss you make as a result of forex realisation event 2 or 4 is disregarded if the event happens in relation to a *qualifying forex account that: (a) you hold at the time of the event; and (b) passes the limited balance test at the time of the event. (2) If CGT event C1 or C2 happens in relation to a *qualifying forex account that: (a) you hold at the time of the event; and (b) passes the limited balance test at the time of the event; disregard so much of any *capital gain or *capital loss you make as a result of the event as is attributable to a *currency exchange rate effect. Note: For currency exchange rate effect, see section 775-105. 775-255 Notional realisation when qualifying forex account starts to pass the limited balance test Credit balance (1) For the purposes of this Division, if: (a) you hold a *qualifying forex account; and (b) at a particular time: (i) the account starts to pass the limited balance test; and (ii) the account has a credit balance; and (iii) you have one or more rights to receive a total amount of *foreign currency represented by the credit balance of the account; you are treated as: (c) having ceased to have those rights at that time; and (d) having re-acquired those rights immediately after that time. Note: This means that forex realisation event 2 will happen when the account starts to pass the limited balance test. Debit balance (2) For the purposes of this Division, if: (a) you hold a *qualifying forex account; and (b) at a particular time: (i) the account starts to pass the limited balance test; and (ii) the account has a debit balance; and (iii) you have one or more obligations to pay a total amount of *foreign currency represented by the debit balance of the account; you are treated as: (c) having ceased to have those obligations at that time; and (d) having started to again owe those obligations immediately after that time. Note: This means that forex realisation event 4 will happen when the account starts to pass the limited balance test. 775-260 Modification of tax recognition time Forex realisation event 2 (1) If: (a) forex realisation event 2 happens in relation to a *qualifying forex account that: (i) you hold at the time of the event; and (ii) does not pass the limited balance test at the time of the event; and (b) apart from this subsection, the tax recognition time, worked out using the table in subsection 775-45(7), happened at a time when the account passed the limited balance test; section 775-45 applies to you as if the tax recognition time were the most recent time before the forex realisation event when the account ceased to pass the limited balance test (despite subsection 775-45(7)). Forex realisation event 4 (2) If: (a) forex realisation event 4 happens in relation to a *qualifying forex account that: (i) you hold at the time of the event; and (ii) does not pass the limited balance test at the time of the event; and (b) apart from this subsection, the tax recognition time, worked out using the table in subsection 775-55(7), happened at a time when the account passed the limited balance test; section 775-55 applies to you as if the tax recognition time were the most recent time before the forex realisation event when the account ceased to pass the limited balance test (despite subsection 775-55(7)). Subdivision 775-E-Retranslation for qualifying forex accounts Guide to Subdivision 775-E 775-265 What this Subdivision is about If you choose retranslation for a qualifying forex account: (a) a forex realisation gain or a forex realisation loss you make in relation to the account as a result of forex realisation event 2 or 4 is disregarded; and (b) forex realisation event 8 enables any gains or losses to be worked out on a retranslation basis. Table of sections Operative provisions 775-270 You may choose retranslation for a qualifying forex account 775-275 Withdrawal of choice 775-280 Tax consequences of choosing retranslation for an account 775-285 Retranslation of gains and losses relating to a qualifying forex account-forex realisation event 8 Operative provisions 775-270 You may choose retranslation for a qualifying forex account (1) You may choose retranslation for a *qualifying forex account held by you. (1A) A choice under subsection (1) does not apply to a *qualifying forex account held by you if a *foreign exchange retranslation election by you is in effect in relation to the account under Subdivision 230-D. (2) A choice must be in writing. (2A) If: (a) either: (i) you make a choice within 30 days after the commencement of the New Business Tax System (Taxation of Financial Arrangements) Act (No. 1) 2003; or (ii) you make a choice within 90 days after the commencement of Part 1 of Schedule 1 to the Tax Laws Amendment (Taxation of Financial Arrangements) Act 2009; and (b) the choice is expressed to have come into effect on a specified day; and (c) the specified day is included in the period: (i) beginning on 1 July 2003; and (ii) ending on the day on which the choice is made; the choice is taken to have come into effect on the specified day. (3) A choice continues in effect until: (a) you cease to hold the account; or (b) the account ceases to be a *qualifying forex account; or (c) a withdrawal of the choice takes effect; whichever happens first. Note: For withdrawal of choice, see section 775-275. 775-275 Withdrawal of choice (1) If you have made a choice for retranslation for a *qualifying forex account held by you, you may withdraw your choice. (2) A withdrawal must be in writing. (3) Withdrawing a choice does not prevent you from making a fresh choice under section 775-270. 775-280 Tax consequences of choosing retranslation for an account (1) A *forex realisation gain or *forex realisation loss you make as a result of forex realisation event 2 or 4 is disregarded if: (a) the event happens in relation to a *qualifying forex account that you hold; and (b) you have made a choice for retranslation for the account; and (c) the choice is in effect when the event happens. (2) If: (a) CGT event C1 or C2 happens in relation to a *qualifying forex account that you hold at the time of the event; and (b) you have made a choice for retranslation for the account; and (c) the choice is in effect when the event happens; disregard so much of any *capital gain or *capital loss you make as a result of the event as is attributable to a *currency exchange rate effect. Note: For currency exchange rate effect, see section 775-105. 775-285 Retranslation of gains and losses relating to a qualifying forex account-forex realisation event 8 Forex realisation event 8 (1) Forex realisation event 8 happens if: (a) you have made a choice for retranslation for a *qualifying forex account held by you; and (b) that choice was in effect throughout a continuous period (the retranslation period) consisting of: (i) an income year; or (ii) a particular part of an income year; and (c) either: (i) there is a positive retranslation amount for the account for the retranslation period (worked out under subsection (2)); or (ii) there is a negative retranslation amount for the account for the retranslation period (worked out under subsection (3)). Retranslation amount (2) If the amount worked out using the formula in subsection (4) is a positive amount, that amount is a positive retranslation amount for the account for the retranslation period. (3) If the amount worked out using the formula in subsection (4) is a negative amount, that amount is a negative retranslation amount for the account for the retranslation period. (4) Work out an amount for the account for the retranslation period using the formula: [pic] (5) For the purposes of subsection (4), a debit balance is to be expressed as a negative amount (for example, a debit balance of $50,000 is to be expressed as[pic]$50,000). Forex realisation gain (6) You make a forex realisation gain if there is a positive retranslation amount for the account for the retranslation period. The amount of the forex realisation gain is the positive retranslation amount. Forex realisation loss (7) You make a forex realisation loss if there is a negative retranslation amount for the account for the retranslation period. The amount of the forex realisation loss is the negative retranslation amount. (8) For the purposes of subsection (7), reverse a negative amount (for example, a negative retranslation amount of[pic]$50,000 will become a forex realisation loss of $50,000). Translation of foreign currency (9) For the purposes of the application of section 960-50 to this section: (a) if a retranslation period for an account did not begin immediately after the end of another retranslation period for the account-the opening balance of the account for the first- mentioned retranslation period is to be translated to Australian currency at the exchange rate applicable at the start of the first-mentioned retranslation period; and (b) if a retranslation period for an account began immediately after the end of another retranslation period for the account- the opening balance of the account for the first-mentioned retranslation period is to be translated to Australian currency at the exchange rate applicable at the end of the other retranslation period; and (c) the closing balance of an account for a retranslation period is to be translated to Australian currency at the exchange rate applicable at the end of the retranslation period; and (d) each deposit is to be translated to Australian currency at the exchange rate applicable at the time of the deposit; and (e) each withdrawal is to be translated to Australian currency at the exchange rate applicable at the time of the withdrawal. Deposits (10) For the purposes of this section, a deposit includes any amount paid or transferred into the account. Withdrawals (11) For the purposes of this section, a withdrawal includes any amount paid, advanced, drawn or transferred out of the account. Subdivision 775-F-Retranslation under foreign exchange retranslation election under Subdivision 230-D Guide to Subdivision 775-F 775-290 What this Subdivision is about If you have made a foreign exchange retranslation election under Subdivision 230-D: (a) a forex realisation gain or a forex realisation loss you make in relation to an arrangement that is not a Division 230 financial arrangement as a result of forex realisation event 1 to 5 or 8 is disregarded; and (b) forex realisation event 9 enables any gains or losses to be worked out on a retranslation basis. Table of sections 775-295 When this Subdivision applies 775-300 Tax consequences of choosing retranslation for arrangement 775-305 Retranslation of gains and losses relating to arrangement to which foreign exchange retranslation election applies-forex realisation event 9 775-310 When election ceases to apply to arrangement 775-315 Balancing adjustment when election ceases to apply to arrangement 775-295 When this Subdivision applies (1) A *foreign exchange retranslation election applies to an *arrangement for the purposes of this Subdivision if: (a) you start to have the arrangement after the start of the income year in which the election is made; and (b) the arrangement is recognised in financial reports of a kind referred to in paragraph 230-255(2)(a) that are audited, or required to be audited, as referred to in paragraph 230- 255(2)(b); and (c) the arrangement is one in relation to which you are required by: (i) *accounting standard AASB 121 (or another accounting standard prescribed for the purposes of paragraph 230-265(1)(c)); or (ii) if that standard does not apply to the preparation of the financial report-a comparable accounting standard that applies to the preparation of the financial report under a *foreign law; to recognise, in the financial reports referred to in paragraph 230-255(1)(a), amounts in profit or loss (if any) that are attributable to changes in currency exchange rates. (2) The *foreign exchange retranslation election does not apply to an *arrangement for the purposes of this Subdivision if: (a) the election is made by the *head company of a *consolidated group or *MEC group; and (b) the election specifies that the election is not to apply to *financial arrangements in relation to *life insurance business carried on by a member of the consolidated group or MEC group; and (c) the arrangement is one that relates to the life insurance business carried on by a member of the consolidated group or MEC group. (3) The *foreign exchange retranslation election does not apply to an *arrangement for the purposes of this Subdivision if the arrangement is associated with a business of a kind specified in regulations made for the purposes of subsection 230-270(4). 775-300 Tax consequences of choosing retranslation for arrangement (1) A *forex realisation gain or *forex realisation loss you make as a result of forex realisation event 1, 2, 3, 4, 5 or 8 is disregarded if: (a) the event happens in relation to an *arrangement that you hold; and (b) you have made a *foreign exchange retranslation election that applies to the arrangement; and (c) the election is in effect when the event happens. (2) If: (a) CGT event C1 or C2 happens in relation to an *arrangement that you hold at the time of the event; and (b) you have made a *foreign exchange retranslation election that applies to the arrangement; and (c) the election is in effect when the event happens; disregard so much of any *capital gain or *capital loss you make as a result of the event as is attributable to a *currency exchange rate effect. Note: For currency exchange rate effect, see section 775-105. 775-305 Retranslation of gains and losses relating to arrangement to which foreign exchange retranslation election applies-forex realisation event 9 Forex realisation event 9 (1) Forex realisation event 9 happens in relation to an *arrangement during an income year if: (a) you have made a *foreign exchange retranslation election that applies to the arrangement; and (b) you are required by: (i) *accounting standard AASB 121 (or another accounting standard prescribed for the purposes of paragraph 230-265(1)(c)); or (ii) if that standard does not apply to the preparation of the financial report-a comparable accounting standard that applies to the preparation of the financial report under a *foreign law; to recognise, in the financial report referred to in paragraph 230-255(1)(a) for that income year, amounts in profit or loss (if any) in relation to the arrangement that are attributable to changes in currency exchange rates. The forex realisation event 9 is taken to have happened in the income year. Forex realisation gain (2) You make a forex realisation gain if the standard referred to in paragraph (1)(b) requires you to recognise an amount in profit in relation to the *arrangement. That amount of the forex realisation gain is the amount the standard requires you to recognise. Forex realisation loss (3) You make a forex realisation loss if the *accounting standard referred to in paragraph (1)(b) requires you to recognise an amount in loss in relation to the *arrangement. That amount of the forex realisation loss is the amount that the accounting standard requires you to recognise. Section does not apply to amounts previously recognised in equity (4) Subsections (1), (2) and (3) do not apply to amounts that have previously been required by the standards referred to in paragraph 230-255(2)(a) to be recognised in equity. 775-310 When election ceases to apply to arrangement (1) For the purposes of this Division, a *foreign exchange retranslation election under subsection 230-255(1) ceases to apply to an *arrangement from the start of an income year if the arrangement ceases to satisfy a requirement of paragraph 775- 295(1)(b) or (c) during that income year. (2) If the election ceases to apply to an *arrangement under subsection (1), the election cannot subsequently reapply to that arrangement (even if the requirements of paragraphs 775-295(1)(b) and (c) are satisfied once more in relation to the arrangement). 775-315 Balancing adjustment when election ceases to apply to arrangement (1) This section applies if: (a) you make a *foreign exchange retranslation election; and (b) the election ceases to have effect or ceases to apply to an *arrangement. (2) You are taken, for the purposes of this Division, to have: (a) disposed of the *arrangement for its fair value immediately before the election ceases to have effect or ceases to apply to the arrangement; and (b) reacquired the arrangement at its fair value immediately after the election ceases to have effect or ceases to apply to the arrangement. Note: Paragraph (a) means that there would be a forex realisation event 9 in relation to the arrangement. Division 802-Foreign residents' income with an underlying foreign source Table of Subdivisions 802-A Conduit foreign income Subdivision 802-A-Conduit foreign income Guide to Subdivision 802-A 802-5 What this Subdivision is about A distribution that an Australian corporate tax entity makes to a foreign resident is not subject to dividend withholding tax, and is not assessable income, to the extent that the entity declares it to be conduit foreign income. An Australian corporate tax entity has an amount that is non- assessable non-exempt income if it receives a distribution including conduit foreign income from another such entity and it makes a distribution including conduit foreign income. This Subdivision sets out the method of working out an entity's conduit foreign income. It also discourages streaming of distributions to entities that can take advantage of the receipt of conduit foreign income. Table of sections Operative provisions 802-10 Objects 802-15 Foreign residents-exempting CFI from Australian tax 802-17 Trust estates and foreign resident beneficiaries-exempting CFI from Australian tax 802-20 Distributions between Australian corporate tax entities- non-assessable non-exempt income 802-25 Conduit foreign income of an Australian corporate tax entity 802-30 Foreign source income amounts 802-35 Capital gains and losses 802-40 Effect of foreign income tax offset on conduit foreign income 802-45 Previous declarations of conduit foreign income 802-50 Receipt of an unfranked distribution from another Australian corporate tax entity 802-55 No double benefits 802-60 No streaming of distributions Operative provisions 802-10 Objects The objects of this Subdivision are: (a) to encourage the establishment in Australia of regional holding companies for foreign groups; and (b) to improve Australia's attractiveness as a continuing base for its multinational companies; by providing relief from tax on *distributions by *Australian corporate tax entities to *members who are foreign residents or other Australian corporate tax entities if those distributions relate to *conduit foreign income. 802-15 Foreign residents-exempting CFI from Australian tax (1) So much of the *unfranked part of a *frankable distribution made by an *Australian corporate tax entity that the entity declares, in its *distribution statement, to be *conduit foreign income: (a) is not assessable income and is not *exempt income of a foreign resident; and (b) is an amount to which section 128B (Liability to withholding tax) of the Income Tax Assessment Act 1936 does not apply. (2) The declaration must be made on or before the day on which the *distribution is made. Note: For a private company, this rule may bring forward the time at which the company is required to make its distribution statement: see section 202-75. 802-17 Trust estates and foreign resident beneficiaries-exempting CFI from Australian tax Foreign resident beneficiaries (1) So much of a share of the net income of a trust as is reasonably attributable to the whole or a part of the *unfranked part of a *frankable distribution made by an *Australian corporate tax entity that the entity declares, in its *distribution statement, to be *conduit foreign income: (a) is not assessable income and is not *exempt income of a beneficiary of the trust who: (i) is a foreign resident; and (ii) is presently entitled to the share of the income of the trust; and (b) is an amount to which section 128B (Liability to withholding tax) of the Income Tax Assessment Act 1936 does not apply. Note: A frankable distribution to which a part of the net income of a trust is reasonably attributable may be made by the Australian corporate tax entity to the trust directly, or to the trust indirectly through one or more interposed trusts. (2) The declaration must be made on or before the day on which the *distribution is made. Note: For a private company, this rule may bring forward the time at which the company is required to make its distribution statement: see section 202-75. Trusts (3) The trustee of a trust is not to be assessed (and pay tax) under section 98, 99 or 99A of the Income Tax Assessment Act 1936 in respect of so much of the net income of the trust as is *non- assessable non-exempt income of a beneficiary of the trust under subsection (1). 802-20 Distributions between Australian corporate tax entities-non- assessable non-exempt income (1) An *Australian corporate tax entity (the receiving entity) has an amount that is not assessable income and is not *exempt income for an income year if: (a) it receives from another Australian corporate tax entity a *frankable distribution that has an *unfranked part; and (b) the *distribution statement for the *distribution declares an amount (a received CFI amount) of the unfranked part to be *conduit foreign income; and (c) the receiving entity, after the start of the income year but before the due day for lodging its *income tax return for that income year: (i) makes a frankable distribution that has an unfranked part; and (ii) declares an amount (a declared CFI amount) of the unfranked part to be conduit foreign income. (2) The amount that is not assessable income and is not *exempt income is the lesser of: (a) the sum of the received CFI amounts that the receiving entity receives during the income year (the total received CFI amounts); and (b) the amount worked out using this formula: [pic] where: related expenses means the receiving entity's expenses that are reasonably related to the total received CFI amounts. total declared CFI amounts means the sum of the declared CFI amounts in distributions made by the receiving entity before the due day for lodging its *income tax return for the income year. Example: AusCo 1 and AusCo 2 are both Australian corporate tax entities. AusCo 1 pays an unfranked dividend of $80 to AusCo 2. AusCo 1 declares all of the $80 to be its conduit foreign income (so the $80 is a received CFI amount). AusCo 2 has $5 of deductible expenses relating to the $80 dividend. AusCo 2 pays an unfranked dividend of $30. AusCo 2 declares $15 of the $30 to be conduit foreign income (so the $15 is a declared CFI amount). The amount that is not assessable income and is not exempt income for AusCo 2 (assuming there are no other received CFI amounts or declared CFI amounts) is: [pic] The remaining $64 is included in AusCo 2's assessable income and it can deduct $4 (the part of the expenses related to the $64). (3) If the receiving entity's expenses that are reasonably related to the total received CFI amounts equal or exceed the total received CFI amounts for an income year, the total received CFI amounts is not assessable income and is not *exempt income of the receiving entity for the income year. (4) If a declared CFI amount is taken into account in working out an amount of *non-assessable non-exempt income of an entity for an income year, that amount cannot be taken into account for the entity for a later income year. (5) Work out how much *conduit foreign income in a *frankable distribution flows through a trust or a partnership in the same way that you work out the *share of a *franking credit on a *franked distribution that flows through a trust or a partnership. That amount is treated as a received CFI amount under this section. Note: See sections 207-50, 207-55 and 207-57 for the share of a franking credit on a franked distribution that flows through a trust or a partnership. 802-25 Conduit foreign income of an Australian corporate tax entity An *Australian corporate tax entity's conduit foreign income at a particular time (the relevant time) is worked out by applying sections 802-30 to 802-55. Note: Subdivision 715-U modifies the single entity and the entry history rule for the purposes of working out conduit foreign income for consolidated groups and MEC groups. 802-30 Foreign source income amounts (1) Work out the amount of the entity's *ordinary income and *statutory income derived by the entity that has been, is or will be included in an income statement or similar statement of the entity or of another entity and that would not be included in the entity's assessable income if the entity: (a) for a company or a *corporate limited partnership-were a foreign resident at the relevant time; or (b) for a *corporate unit trust or *public trading trust-were not a *resident unit trust for the income year in which the relevant time occurs. Note: Income statements are prepared under the Framework for the Preparation and Presentation of Financial Statements (which is referred to in the Australian Accounting Standards). (2) Reduce the subsection (1) amount by any part of that amount that is or will be included in the entity's assessable income (apart from section 802-20). (3) Add to the amount remaining after subsection (2) these amounts: (a) if the entity receives from another *Australian corporate tax entity a *frankable distribution that has an *unfranked part- any amount declared in the *distribution statement for that *distribution to be *conduit foreign income; (b) an amount that is treated as a received CFI amount for the purposes of section 802-20 because of subsection 802-20(5); (c) an amount that is *non-assessable non-exempt income under section 23AJ of the Income Tax Assessment Act 1936 and that would be not be included under subsection (1). (4) Reduce the amount remaining after subsection (3) by these amounts: (a) an amount that is *non-assessable non-exempt income under section 23AI or 23AK of the Income Tax Assessment Act 1936; (b) an amount that is not included in the entity's assessable income because of the operation of paragraph 99B(2)(e) of that Act; (c) the amount worked out using the formula: [pic] where: available franking credit means any part of the amount remaining after subsection (3) to the extent to which a *franking credit arises or will arise for the entity. (5) Reduce the amount remaining after subsection (4) by any of the entity's expenses that are reasonably related to that amount, except expenses the entity has deducted or can deduct under this Act. In applying this subsection to an amount covered by paragraph (3)(a), assume that amount is *non-assessable non-exempt income. (6) The result is an amount included in the entity's conduit foreign income. (7) This section applies to an entity as if it had derived an amount if the amount has been applied for its benefit (including by discharging all or part of a debt it owes) or as it directs. 802-35 Capital gains and losses Capital gains (1) The entity's conduit foreign income includes these amounts: (a) the amount by which a *capital gain of the entity is reduced because of the operation of section 768-505; (b) a capital gain that is disregarded because of the operation of subsection 23AH(3) of the Income Tax Assessment Act 1936; (c) the amount of a capital gain that is disregarded as a result of the operation of an international tax sharing treaty (as defined in subsection 136AA(1) of the Income Tax Assessment Act 1936). Capital losses (2) The entity's conduit foreign income is reduced by these amounts: (a) the amount by which a *capital loss of the entity is reduced because of the operation of section 768-505; (b) a capital loss that is disregarded because of the operation of subsection 23AH(4) of the Income Tax Assessment Act 1936; (c) the amount of a capital loss that is disregarded as a result of the operation of an international tax sharing treaty (as defined in subsection 136AA(1) of the Income Tax Assessment Act 1936). Timing rule (3) The adjustments are made under this section at the end of the income year in which the *CGT event occurred. 802-40 Effect of foreign income tax offset on conduit foreign income The entity's conduit foreign income includes an amount if a tax offset arose for the entity under Division 770 for the income year immediately before the one in which the relevant time occurs. The amount is worked out using the formula: [pic] 802-45 Previous declarations of conduit foreign income The entity's conduit foreign income is reduced if: (a) the entity makes a *frankable distribution that has an *unfranked part; and (b) the entity declares an amount of the unfranked part to be conduit foreign income. The amount of the reduction is the amount so declared. Note: If the amount declared is less than the amount available for declaration, the difference is available for a later declaration. 802-50 Receipt of an unfranked distribution from another Australian corporate tax entity (1) The entity's conduit foreign income is reduced if: (a) the entity (the receiving entity) receives from another *Australian corporate tax entity a *frankable distribution that has an *unfranked part; and (b) the *distribution statement for the *distribution declares an amount (the declared amount) of the unfranked part to be conduit foreign income; and (c) some or all of the declared amount is not *non-assessable non- exempt income under section 802-20. (2) The amount of the reduction is the amount that is not *non- assessable non-exempt income under section 802-20 less any expenses reasonably related to that amount. 802-55 No double benefits An amount cannot be both: (a) an unfranked non-portfolio dividend credit for an entity under section 46FB of the Income Tax Assessment Act 1936; and (b) counted towards: (i) the entity's *conduit foreign income; and (ii) the entity's *non-assessable non-exempt income under section 802-20. 802-60 No streaming of distributions (1) Subsection (2) has effect if: (a) an *Australian corporate tax entity makes one or more *frankable distributions in a *franking period; and (b) at least one of the *distributions has an *unfranked part; and (c) the entity declares an amount of the unfranked part to be *conduit foreign income. (2) If the entity does not, for that *franking period, declare the same proportion of *conduit foreign income for all *membership interests and *non-share equity interests then, instead of the amount that it declared to be conduit foreign income on those *distributions, it is taken to have declared under section 802-45 the greater amount that it would have declared had it declared that same proportion on all those distributions. Note: Breaching subsection (2) may make the entity subject to a penalty under section 288-80 in Schedule 1 to the Taxation Administration Act 1953 (about over declaring conduit foreign income). Example: There are 10,000 membership interests in AusCo Limited, 7,500 held by foreign residents and 2,500 held by Australian residents. It has $1,800 of conduit foreign income. AusCo makes an unfranked distribution of 50 cents per membership interest to all of its members. It declares $1,500 of the distribution to be conduit foreign income for its 7,500 foreign membership interests (20 cents per membership interest or 40% of each distribution) and none for its Australian membership interests. AusCo is taken to have declared the same proportion (40% of each distribution) of conduit foreign income for its Australian membership interests (which amounts to $500 of conduit foreign income). It is therefore taken to have declared $2,000 of conduit foreign income. This is an over- declaration of $200 and a penalty under section 288-80 in Schedule 1 to the Taxation Administration Act 1953 will apply. (3) For the purposes of subsection (2), ignore *membership interests and *non-share equity interests that do not carry a right to receive *distributions (other than distributions on winding up). (4) Despite subsection (2), an entity that receives a *frankable distribution that has an *unfranked part is entitled to rely on the *distribution statement made by the entity that made the distribution. Division 820-Thin capitalisation rules Table of Subdivisions Guide to Division 820 820-A Preliminary 820-B Thin capitalisation rules for outward investing entities (non- ADI) 820-C Thin capitalisation rules for inward investing entities (non- ADI) 820-D Thin capitalisation rules for outward investing entities (ADI) 820-E Thin capitalisation rules for inward investing entities (ADI) 820-EA Some financial entities may choose to be treated as ADIs 820-FA How the thin capitalisation rules apply to consolidated groups and MEC groups 820-FB Grouping branches of foreign banks and foreign financial entities with a consolidated group, MEC group or single Australian resident company 820-G Calculating the average values 820-H Control of entities 820-HA Controlled foreign entity debt and controlled foreign entity equity 820-I Associate entities 820-J Equity interests in trusts and partnerships 820-K Zero-capital amounts 820-KA Cost-free debt capital and excluded equity interests 820-L Record keeping requirements Guide to Division 820 820-1 What this Division is about This Division applies to foreign controlled Australian entities, Australian entities that operate internationally and foreign entities that operate in Australia. Financing expenses that an entity can otherwise deduct from its assessable income may be disallowed under this Division in the following circumstances: . for an entity that is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (an ADI)- the entity's debt exceeds the prescribed level (and the entity is therefore "thinly capitalised"); . for an entity that is an ADI-the entity's capital is less than the prescribed level (and the entity is therefore "thinly capitalised"). Table of sections 820-5 Does this Division apply to an entity? 820-10 Map of Division 820-5 Does this Division apply to an entity? The following diagram shows you how to work out whether this Division applies to an entity. [pic] 820-10 Map of Division The following table sets out a map of this Division. |Map of Division | |Item |This Subdivision: |sets out: | |1 |Subdivision 820-B |(a) the meaning of maximum | | |or 820-C |allowable debt for the | | | |Subdivision; and | | | |(b) how an entity covered by | | | |the Subdivision would have | | | |all or a part of its debt | | | |deductions disallowed if the | | | |maximum allowable debt is | | | |exceeded; and | | | |(c) the application of these | | | |rules in relation to a part | | | |of an income year. | |2 |Subdivision 820-D |(a) the meaning of minimum | | |or 820-E |capital amount for the | | | |Subdivision; and | | | |(b) how an entity covered by | | | |the Subdivision would have | | | |all or a part of its debt | | | |deductions disallowed if the | | | |minimum capital amount is not| | | |reached; and | | | |(c) the application of these | | | |rules in relation to a part | | | |of an income year. | |3A |Subdivision 820-FA |how this Division applies to | | | |a consolidated group or MEC | | | |group. | |3B |Subdivision 820-FB |special rules for grouping | | | |foreign bank branches with a | | | |consolidated group, MEC group| | | |or single Australian resident| | | |company. | |4 |Subdivision 820-G |the methods of calculating | | | |the average value of a matter| | | |for the purposes of this | | | |Division. | |5 |Subdivision 820-H |the rules for determining: | | | |(a) whether or not an | | | |Australian entity controls a | | | |foreign entity (for the | | | |purposes of determining | | | |whether or not | | | |Subdivision 820-B or 820-D | | | |applies to that Australian | | | |entity); and | | | |(b) whether or not an | | | |Australian entity is | | | |controlled by a foreign | | | |entity (for the purposes of | | | |determining whether or not | | | |Subdivision 820-C applies to | | | |that Australian entity). | |5A |Subdivision 820-HA |the meaning of controlled | | | |foreign entity debt and | | | |controlled foreign entity | | | |equity for the purposes of | | | |this Division. | |6 |Subdivision 820-I |the meaning of various | | | |concepts about associate | | | |entity for the purposes of | | | |this Division. | |7 |Subdivision 820-J |the meaning of equity | | | |interests in trusts and | | | |partnerships for the purposes| | | |of this Division. | |8 |Subdivision 820-K |the meaning of zero-capital | | | |amount for the purposes of | | | |this Division. | |8A |Subdivision 820-KA |the meaning of cost-free debt| | | |capital, and excluded equity | | | |interest, for the purposes of| | | |this Division. | |9 |Subdivision 820-L |special record keeping | | | |requirements for the purposes| | | |of this Division. | Subdivision 820-A-Preliminary Table of sections 820-30 Object of Division 820-32 Exemption for private or domestic assets and non-debt liabilities 820-35 Application-$250,000 threshold 820-37 Application-assets threshold 820-39 Exemption of certain special purpose entities 820-40 Meaning of debt deduction 820-30 Object of Division The Object of this Division is to ensure that the following entities do not reduce their tax liabilities by using an excessive amount of *debt capital to finance their Australian operations: (a) *Australian entities that operate internationally; (b) Australian entities that are foreign controlled; (c) *foreign entities that operate in Australia. 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. 820-35 Application-$250,000 threshold Subdivision 820-B, 820-C, 820-D or 820-E does not apply to disallow any *debt deduction of an entity for an income year if the total debt deductions of that entity and all its *associate entities for that year are $250,000 or less. 820-37 Application-assets threshold (1) Subdivision 820-B, 820-C, 820-D or 820-E does not apply to disallow any *debt deduction of an entity for an income year if: (a) the entity is an *outward investing entity (non-ADI) or an *outward investing entity (ADI) for a period that is all or any part of that year; and (b) the entity is not also an *inward investing entity (non-ADI) or an *inward investing entity (ADI) for all or any part of that period; and (c) the result of applying the following formula is equal to or greater than 0.9: [pic] where: 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. 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. 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 *overseas 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 *overseas permanent establishments of the Australian entity. 820-39 Exemption of certain special purpose entities (1) Subdivision 820-B, 820-C, 820-D or 820-E does not apply to disallow any *debt deduction of an entity for an income year if the entity meets the conditions in subsection (3) throughout the income year. (2) Subdivision 820-B, 820-C, 820-D or 820-E does not apply to disallow any *debt deduction of an entity for an income year that is an amount incurred by the entity during a part of that year, if the entity meets the conditions in subsection (3) throughout that part. (3) The conditions are: (a) the entity is one established for the purposes of managing some or all of the economic risk associated with assets, liabilities or investments (whether the entity assumes the risk from another entity or creates the risk itself); and (b) the total value of *debt interests in the entity is at least 50% of the total value of the entity's assets; and (c) the entity is an insolvency-remote special purpose entity according to criteria of an internationally recognised rating agency that are applicable to the entity's circumstances. (4) The condition in paragraph (3)(c) can be met without the rating agency determining that the entity meets those criteria. Note 1: While an entity meets the conditions in subsection (3), it is treated for the purposes of this Division as not being a member of a consolidated group or MEC group (see section 820- 584). Note 2: An entity that does not qualify for the exemption in this section may still be a securitisation vehicle under subsection 820-942(2), in which case the value of its securitised assets will count towards its zero-capital amount under Subdivision 820-K. Multi-tier special purpose entities (5) An entity is taken to meet the conditions in subsection (3) throughout a period that is all or part of an income year, if the entity is one of 2 or more entities that together satisfy the condition that, assuming: (a) each of the entities had been a division or part of the same entity (the notional entity), rather than a separate entity, throughout that period; and (b) the notional entity had consisted only of those divisions and parts throughout that period; the notional entity would meet the conditions in subsection (3) throughout that period. 820-40 Meaning of debt deduction (1) Debt deduction, of an entity and for an income year, is a cost incurred by the entity in relation to a *debt interest issued by the entity, to the extent to which: (a) the cost is: (i) interest, an amount in the nature of interest, or any other amount that is calculated by reference to the time value of money; or (ii) the difference between the *financial benefits received, or to be received, by the entity under the *scheme giving rise to the debt interest and the financial benefits provided, or to be provided, under that scheme; or (iii) any amount directly incurred in obtaining or maintaining the financial benefits received, or to be received, by the entity under the scheme giving rise to the debt interest; or (iv) any other expense incurred by the entity that is specified in the regulations made for the purposes of this subparagraph; and (b) the entity can, apart from this Division, deduct the cost from its assessable income for that year; (2) A cost covered by paragraph (1)(a) includes, but is not limited to, any of the following: (a) an amount in substitution for interest; (b) a discount in respect of a security; (c) a fee or charge in respect of a debt, including application fees, line fees, service fees, brokerage and stamp duty in respect of document registration or security for the debt interest; (d) an amount that is taken under an *income tax law to be an amount of interest in respect of a lease, a hire purchase arrangement or any other *arrangement specified in that law; (e) any loss in respect of: (i) a reciprocal purchase agreement (otherwise known as a repurchase agreement); (ii) a sell-buyback arrangement; (iii) a securities loan arrangement; (f) any amount covered by paragraph (1)(a) that has been assigned or is dealt with in any way on behalf of the party who would otherwise be entitled to that amount. (3) To avoid doubt, the following amounts that are incurred by an entity in relation to a *debt interest issued by the entity are not covered by paragraph (1)(a): (a) losses and outgoings directly associated with hedging or managing the financial risk in respect of the debt interest; (b) losses incurred by the entity in relation to which the following apply: (i) the losses would otherwise be a cost covered by subparagraph (1)(a)(ii); but (ii) the benefits mentioned in that subparagraph are measured in a foreign currency or a unit of account other than Australian currency (for example, ounces of gold) and the losses have arisen only because of changes in the rate of converting that foreign currency or that unit of account into Australian currency; (c) salary or wages; (d) rental expenses for a lease if the lease is not a debt interest; (e) an expense specified in the regulations made for the purposes of this paragraph. Subdivision 820-B-Thin capitalisation rules for outward investing entities (non-ADI) Guide to Subdivision 820-B 820-65 What this Subdivision is about This Subdivision sets out the thin capitalisation rules that apply to an Australian entity that has certain types of overseas investments and is not an authorised deposit-taking institution (an ADI). These rules deal with the following matters: . how to work out the entity's maximum allowable debt for an income year; . how all or a part of the debt deductions claimed by the entity may be disallowed if the maximum allowable debt is exceeded; . how to apply these rules to a period that is less than an income year. Table of sections Operative provisions 820-85 Thin capitalisation rule for outward investing entities (non-ADI) 820-90 Maximum allowable debt 820-95 Safe harbour debt amount-outward investor (general) 820-100 Safe harbour debt amount-outward investor (financial) 820-105 Arm's length debt amount 820-110 Worldwide gearing debt amount 820-115 Amount of debt deduction disallowed 820-120 Application to part year periods Operative provisions 820-85 Thin capitalisation rule for outward investing entities (non-ADI) Thin capitalisation rule (1) This subsection disallows all or a part of each *debt deduction of an entity for an income year (to the extent that it is not attributable to an *overseas permanent establishment of the entity) if, for that year: (a) the entity is an *outward investing entity (non-ADI) (see subsection (2)); and (b) the entity's *adjusted average debt (see subsection (3)) exceeds its *maximum allowable debt (see section 820-90). Note 1: This Subdivision does not apply if the total debt deductions of that entity and all its associate entities for that year are $250,000 or less, see section 820-35. Note 2: To work out the amount to be disallowed, see section 820- 115. Note 3: For the rules that apply to an entity that is an outward investing entity (non-ADI) for only a part of an income year, see section 820-120 in conjunction with subsection (2) of this section. Note 4: A consolidated group or MEC group may be an outward investing entity (non-ADI) to which this Subdivision applies: see Subdivisions 820-FA and 820-FB. Outward investing entity (non-ADI) (2) The entity is an outward investing entity (non-ADI) for a period that is all or a part of an income year if, and only if, it is: (a) an *outward investor (general) for that period (as set out in items 1 and 3 of the following table); or (b) an *outward investor (financial) for that period (as set out in items 2 and 4 of that table). |Outward investing entity (non-ADI) | |Item |If: |and: |then: | |1 |the entity (the relevant |the |the | | |entity) is one or both of |relevant |relevant | | |the following throughout a|entity is |entity is | | |period that is all or a |not a |an outward| | |part of an income year: |*financial|investor | | |(a) an *Australian |entity, |(general) | | |controller of at least one|nor an |for that | | |*Australian controlled |*ADI, at |period | | |foreign entity (not |any time | | | |necessarily the same |during | | | |Australian controlled |that | | | |foreign entity throughout |period | | | |that period); | | | | |(b) an Australian entity | | | | |that carries on a | | | | |*business at or through at| | | | |least one *overseas | | | | |permanent establishment | | | | |(not necessarily the same | | | | |permanent establishment | | | | |throughout that period) | | | |2 |the entity (the relevant |the |the | | |entity) satisfies this |relevant |relevant | | |column in item 1 |entity is |entity is | | | |a |an outward| | | |*financial|investor | | | |entity |(financial| | | |throughout|) for that| | | |that |period | | | |period | | |3 |(a) the entity (the |the |the | | |relevant entity) is an |relevant |relevant | | |*Australian entity |entity is |entity is | | |throughout a period that |not a |an outward| | |is all or a part of an |*financial|investor | | |income year; and |entity, |(general) | | |(b) throughout that |nor an |for that | | |period, the relevant |*ADI, at |period | | |entity is an *associate |any time | | | |entity of another |during | | | |Australian entity; and |that | | | |(c) that other Australian |period | | | |entity is an *outward | | | | |investing entity (non-ADI)| | | | |or an *outward investing | | | | |entity (ADI) for that | | | | |period | | | |4 |the entity (the relevant |the |the | | |entity) and another |relevant |relevant | | |Australian entity satisfy |entity is |entity is | | |this column in item 3 |a |an outward| | | |*financial|investor | | | |entity |(financial| | | |throughout|) for that| | | |that |period | | | |period | | Note 1: To determine whether an entity is an Australian controller of an Australian controlled foreign entity, see Subdivision 820-H. Note 2: The rules that apply to an outward investor (general) are different from those that apply to an outward investor (financial) in some instances. For example, see sections 820- 95 and 820-100. Adjusted average debt (3) The entity's adjusted average debt for an income year is the result of applying the method statement in this subsection. In applying the method statement, disregard any amount that is attributable to the entity's *overseas permanent establishments. Method statement Step 1. Work out the average value, for that year (the relevant year), of all the *debt capital of the entity that gives rise to *debt deductions of the entity for that or any other income year. Step 2. Reduce the result of step 1 by the average value, for the relevant year, of all the *associate entity debt of the entity. Step 3. Reduce the result of step 2 by the average value, for the relevant year, of all the *controlled foreign entity debt of the entity. Step 4. If the entity is a *financial entity throughout the relevant year, add to the result of step 3 the average value, for the relevant year, of the entity's *borrowed securities amount. Step 5. Add to the result of step 4 the average value, for the relevant year, of the *cost-free debt capital of the entity. The result of this step is the adjusted average debt. Note: To calculate an average value for the purposes of this Division, see Subdivision 820-G. (4) The entity's *adjusted average debt does not exceed its *maximum allowable debt if the adjusted average debt is nil or a negative amount. 820-90 Maximum allowable debt Entity is not also an inward investment vehicle (general) or inward investment vehicle (financial) (1) The entity's maximum allowable debt for an income year is the greatest of the following amounts if the entity is not also an *inward investment vehicle (general) or an *inward investment vehicle (financial) for all or any part of that year: (a) the *safe harbour debt amount; (b) the *arm's length debt amount; (c) unless the entity has *worldwide equity of a negative amount- the *worldwide gearing debt amount. Note: The safe harbour debt amount and the worldwide gearing debt amount differ depending on whether the entity is an outward investor (general) or an outward investor (financial), see sections 820-95, 820-100 and 820-110. Entity is also an inward investment vehicle (general) or inward investment vehicle (financial) (2) The entity's maximum allowable debt for an income year is the greater of the following amounts if the entity is also an *inward investment vehicle (general) or an *inward investment vehicle (financial) for all or any part of that year: (a) the *safe harbour debt amount; (b) the *arm's length debt amount. Note: The safe harbour debt amount differs depending on whether the entity is an outward investor (general) or an outward investor (financial), see sections 820-95 and 820-100. 820-95 Safe harbour debt amount-outward investor (general) If the entity is an *outward investor (general) for the income year, the safe harbour debt amount is the result of applying the method statement in this section. In applying the method statement, disregard any amount that is attributable to the entity's *overseas permanent establishments. Method statement Step 1. Work out the average value, for the income year, of all the assets of the entity. Step 1A. Reduce the result of step 1 by the average value, for that year, of all the *excluded equity interests in the entity. Step 2. Reduce the result of step 1A by the average value, for that year, of all the *associate entity debt of the entity. Step 3. Reduce the result of step 2 by the average value, for that year, of all the *associate entity equity of the entity. Step 4. Reduce the result of step 3 by the average value, for that year, of all the *controlled foreign entity debt of the entity. Step 5. Reduce the result of step 4 by the average value, for that year, of all the *controlled foreign entity equity of the entity. Step 6. Reduce the result of step 5 by the average value, for that year, of all the *non-debt liabilities of the entity. If the result of this step is a negative amount, it is taken to be nil. Step 7. Multiply the result of step 6 by 3/4. Step 8. Add to the result of step 7 the average value, for that year, of the entity's *associate entity excess amount. The result of this step is the safe harbour debt amount. Example: AK Pty Ltd, a company that is an Australian entity, has an average value of assets (other than assets attributable to its overseas permanent establishments) of $100 million. The average values of its relevant associate entity debt, associate entity equity, controlled foreign entity debt, controlled foreign entity equity and non-debt liabilities are $10 million, $8 million, $5 million, $2 million and $5 million respectively. Deducting these amounts from the result of step 1 (through the application of steps 2 to 6) leaves $70 million. Multiplying $70 million by 3/4 results in $52.5 million. As the average value of the company's associate entity excess amount is $4.5 million, the safe harbour debt amount is therefore $57 million. 820-100 Safe harbour debt amount-outward investor (financial) (1) If the entity is an *outward investor (financial) for the income year, the safe harbour debt amount is the lesser of the following amounts: (a) the *total debt amount (worked out under subsection (2)); (b) the *adjusted on-lent amount (worked out under subsection (3)). However, if the 2 amounts are equal, it is the total debt amount. Total debt amount (2) The total debt amount is the result of applying the method statement in this subsection. In applying the method statement, disregard any amount that is attributable to the entity's *overseas permanent establishments. Method statement Step 1. Work out the average value, for the income year, of all the assets of the entity. Step 1A. Reduce the result of step 1 by the average value, for that year, of all the *excluded equity interests in the entity. Step 2. Reduce the result of step 1A by the average value, for that year, of all the *associate entity debt of the entity. Step 3. Reduce the result of step 2 by the average value, for that year, of all the *associate entity equity of the entity. Step 4. Reduce the result of step 3 by the average value, for that year, of all the *controlled foreign entity debt of the entity. Step 5. Reduce the result of step 4 by the average value, for that year, of all the *controlled foreign entity equity of the entity. Step 6. Reduce the result of step 5 by the average value, for that year, of all the *non-debt liabilities of the entity. Step 7. Reduce the result of step 6 by the average value, for that year, of the entity's *zero-capital amount. If the result of this step is a negative amount, it is taken to be nil. Step 8. Multiply the result of step 7 by 20/21. Step 9. Add to the result of step 8 the average value, for that year, of the entity's *zero-capital amount. Step 10. Add to the result of step 9 the average value, for that year, of the entity's *associate entity excess amount. The result of this step is the total debt amount. Example: GLM Limited, a company that is an Australian entity, has an average value of assets (other than assets attributable to its overseas permanent establishments) of $160 million. The average values of its relevant associate entity debt, associate entity equity, controlled foreign entity debt, controlled foreign entity equity, non-debt liabilities and zero capital amount are $5 million, $5 million, $9 million, $6 million, $5 million and $4 million respectively. Deducting these amounts from the result of step 1 (through applying steps 2 to 7) leaves $126 million. Multiplying $126 million by 20/21 results in $120 million. Adding the average zero capital amount of $4 million results in $124 million. As the company does not have any associate entity excess amount, the total debt amount is therefore $124 million. Adjusted on-lent amount (3) The adjusted on-lent amount is the result of applying the method statement in this subsection. In applying the method statement, disregard any amount that is attributable to the entity's *overseas permanent establishments. Method statement Step 1. Work out the average value, for the income year, of all the assets of the entity. Step 1A. Reduce the result of step 1 by the average value, for that year, of all the *excluded equity interests in the entity. Step 2. Reduce the result of step 1A by the average value, for that year, of all the *associate entity equity of the entity. Step 3. Reduce the result of step 2 by the average value, for that year, of all the *controlled foreign entity debt of the entity. Step 4. Reduce the result of step 3 by the average value, for that year, of all the *controlled foreign entity equity of the entity. Step 5. Reduce the result of step 4 by the average value, for that year, of all the *non-debt liabilities of the entity. Step 6. Reduce the result of step 5 by the amount (the average on- lent amount) which is the average value, for that year, of the entity's *on-lent amount (other than *controlled foreign entity debt of the entity). If the result of this step is a negative amount, it is taken to be nil. Step 7. Multiply the result of step 6 by 3/4. Step 8. Add to the result of step 7 the average on-lent amount. Step 9. Reduce the result of step 8 by the average value, for that year, of all the *associate entity debt of the entity. Step 10. Add to the result of step 9 the average value, for that year, of the entity's *associate entity excess amount. The result of this step is the adjusted on-lent amount. Example: GLM Limited, a company that is an Australian entity, has an average value of assets (other than assets attributable to its overseas permanent establishments) of $160 million. The average values of its relevant associate entity equity, controlled foreign entity debt, controlled foreign entity equity, non-debt liabilities and on-lent amount are $5 million, $9 million, $6 million, $5 million and $35 million respectively. Deducting these amounts from the result of step 1 (through applying steps 2 to 6) leaves $100 million. Multiplying $100 million by 3/4 results in $75 million. Adding the average on-lent amount of $35 million results in $110 million. Reducing the result of step 8 by the associate entity debt amount of $5 million equals $105 million. As the company does not have any associate entity excess amount, the adjusted on-lent amount is therefore $105 million. 820-105 Arm's length debt amount (1) The arm's length debt amount is a notional amount that, having regard to the factual assumptions set out in subsection (2) and the relevant factors mentioned in subsection (3), would satisfy both paragraphs (a) and (b): (a) the amount represents a notional amount of *debt capital that: (i) the entity would reasonably be expected to have throughout the income year; and (ii) would give rise to an amount of *debt deductions of the entity for that or any other income year; and (iii) would be attributable to the entity's Australian business as mentioned in subsection (2); (b) commercial lending institutions that were not *associates of the entity (the notional lenders) would reasonably be expected to have entered into *schemes that would: (i) give rise to *debt interests that constituted that notional amount of debt capital of the entity; and (ii) provide for terms and conditions for the debt interests that would reasonably be expected to have applied if the entity and the notional lenders had been dealing at arm's length with each other throughout the income year mentioned in subparagraph (1)(a)(i). Note: The entity must keep records in accordance with section 820-980 if the entity works out an amount under this section. Factual assumptions (2) Irrespective of what actually happened during that year, the following assumptions must be made in working out that amount: (a) the entity's commercial activities in connection with Australia (the Australian business) during that year do not include: (i) any *business carried on by the entity at or through its *overseas permanent establishments; and (ii) the holding of any *associate entity debt, *controlled foreign entity debt or *controlled foreign entity equity; and (b) the entity had carried on the Australian business that it actually carried on during that year; (c) the nature of the entity's assets and liabilities (to the extent that they are attributable to the Australian business) had been as they were during that year; (d) except as stated in paragraph (1)(b) and paragraphs (e), (f) and (g) of this subsection, the entity had carried on the Australian business in the same circumstances as what actually existed during that year; (e) any guarantee, security or other form of credit support provided to the entity in relation to the Australian business during that year: (i) by its *associates; or (ii) by the use of assets of the entity that are attributable to the entity's overseas permanent establishments; is taken not to have been received by the entity; (f) the entity's only activities during that year were the Australian business; (g) the entity's only assets and liabilities during that year were those referred to in paragraph (c) of this subsection. However, the assumptions set out in paragraphs (f) and (g) of this subsection are not to be made in taking into account the relevant factors mentioned in subsection (3). Relevant factors (3) On the basis of the factual assumptions set out in subsection (2), the following factors must be taken into account in determining whether or not an amount satisfies paragraphs (1)(a) and (b): (a) the functions performed, the assets used, and the risks assumed, by the entity in relation to the Australian business throughout that year; (b) the terms and conditions of the *debt capital that the entity actually had in relation to the Australian business throughout that year; (c) the nature of, and title to, any assets of the entity attributable to the Australian business that were available to the entity throughout that year as security for its debt capital for that business; (d) the purposes for which *schemes for debt capital had been actually entered into by the entity in relation to the Australian business throughout that year; (e) the entity's capacity to meet all its liabilities in relation to the Australian business (whether during that year or at any other time); (f) the profit of the entity (within the meaning of the *accounting standards), and the return on its capital, in relation to the Australian business (whether during that year or at any other time); (g) the debt to equity ratios of the following throughout that year: (i) the entity; (ii) the entity in relation to the Australian business; (iii) each of the entity's *associate entities that engage in commercial activities similar to the Australian business; (h) the commercial practices adopted by independent parties dealing with each other at arm's length in the industry in which the entity carries on the Australian business throughout that year (whether in Australia or in comparable markets elsewhere); (i) the way in which the entity financed its commercial activities (other than the Australian business) throughout that year; (j) the general state of the Australian economy throughout that year; (k) all of the above factors existing at the time when the entity last entered into a scheme that gave rise to an actual *debt interest attributable to the Australian business that remains *on issue throughout that year; (l) any other factors which are specified in the regulations made for the purposes of this section, including factors specific to an *outward investor (general) or an *outward investor (financial). Commissioner's power (4) If the Commissioner considers an amount worked out by the entity under this section does not appropriately take into account the factual assumptions and the relevant factors, the Commissioner may substitute another amount that the Commissioner considers better reflects those assumptions and factors. 820-110 Worldwide gearing debt amount Outward investor (general) (1) If the entity is an *outward investor (general) for the income year, the worldwide gearing debt amount is the result of applying the method statement in this subsection. Method statement Step 1. Divide the average value of all the entity's *worldwide debt for the income year by the average value of all the entity's *worldwide equity for that year. Step 2. Multiply the result of step 1 by 12/10. Step 3. Add 1 to the result of step 2. Step 4. Divide the result of step 2 by the result of step 3. Step 5. Multiply the result of step 4 in this method statement by the result of step 6 in the method statement in section 820- 95. Step 6. Add to the result of step 5 the average value, for that year, of the entity's *associate entity excess amount. The result of this step is the worldwide gearing debt amount. Example: AK Pty Ltd, a company that is an Australian entity, has an average value of worldwide debt of $83.4 million and an average value of worldwide equity of $27 million. The result of applying steps 1 and 2 is therefore 3.706. Dividing 3.706 by 4.706 (through applying steps 3 and 4) and multiplying the result by $70 million (which is the result of step 6 in the method statement in section 820-95) equals $55.13 million. As the average value of the company's associate entity excess amount is $4.5 million, the worldwide gearing debt amount is therefore $59.63 million. Outward investor (financial) (2) If the entity is an *outward investor (financial) for that year, the worldwide gearing debt amount is the result of applying the method statement in this subsection. Method statement Step 1. Divide the average value of all the entity's *worldwide debt for the income year by the average value of all the entity's *worldwide equity for that year. Step 2. Multiply the result of step 1 by 12/10. Step 3. Add 1 to the result of step 2. Step 4. Divide the result of step 2 by the result of step 3. Step 5. Multiply the result of step 4 in this method statement by the result of step 7 in the method statement in subsection 820-100(2). Step 6. Add to the result of step 5 the average value, for that year, of the entity's *zero-capital amount (other than any zero-capital amount that is attributable to the entity's *overseas permanent establishments). Step 7. Add to the result of step 6 the average value, for that year, of the entity's *associate entity excess amount. The result of this step is the worldwide gearing debt amount. Example: GLM Limited, a company that is an Australian entity, has an average value of worldwide debt of $120 million and an average value of worldwide equity of $40 million. The result of applying steps 1 and 2 is therefore 3.6. Dividing 3.6 by 4.6 (through applying steps 3 and 4) and multiplying the result by $126 million (which is the result of step 7 of the method statement in subsection 820-100(2)) equals $98.61 million. The average value of zero-capital amount (see step 7 of the method statement in subsection 820-100(2)) is $4 million. Adding that amount to $98.61 million results in $102.61 million. As the company does not have any associate entity excess amount, the worldwide gearing debt amount is therefore $102.61 million. 820-115 Amount of debt deduction disallowed The amount of *debt deduction disallowed under subsection 820- 85(1) is worked out using the following formula: [pic] where: 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). debt deduction means each *debt deduction covered by subsection 820- 85(1). excess debt means the amount by which the entity's *adjusted average debt for that year (see subsection 820-85(3)) exceeds its *maximum allowable debt for that year. Note: The disallowed amount also does not form part of the cost base of a CGT asset. See section 110-54. 820-120 Application to part year periods (1) This subsection disallows all or a part of each *debt deduction of an entity for an income year that is an amount incurred by the entity during a period that is a part of that year (to the extent that it is not attributable to an *overseas permanent establishment of the entity), if: (a) the entity is an *outward investing entity (non-ADI) for that period; and (b) the entity's *adjusted average debt for that period exceeds the entity's *maximum allowable debt for that period. Note: To determine whether an entity is an outward investing entity (non-ADI) for that period, see subsection 820-85(2). (2) The entity's adjusted average debt for that period is the result of applying the method statement in this subsection. In applying the method statement, disregard any amount that is attributable to the entity's *overseas permanent establishments. Method statement Step 1. Work out the average value, for that period, of all the *debt capital of the entity that gives rise to *debt deductions of the entity for that or any other income year. Step 2. Reduce the result of step 1 by the average value, for that period, of all the *associate entity debt of the entity. Step 3. Reduce the result of step 2 by the average value, for that period, of all the *controlled foreign entity debt of the entity. Step 4. If the entity is a *financial entity throughout that period, add to the result of step 3 the average value, for that period, of the entity's *borrowed securities amount. Step 5. Add to the result of step 4 the average value, for that period, of the *cost-free debt capital of the entity. The result of this step is the adjusted average debt. (3) The entity's *adjusted average debt does not exceed its *maximum allowable debt if the adjusted average debt is nil or a negative amount. (4) For the purposes of determining: (a) the *maximum allowable debt for the period mentioned in subsection (1); and (b) the amount of each *debt deduction to be disallowed; sections 820-90 to 820-115 apply in relation to that entity and that period with the modifications set out in the following table: |Modifications of sections 820-90 to 820-115 | |Item |Provisions |Modifications | |1 |Sections 820-90 |A reference to an income year | | |to 820-115 |is taken to be a reference to | | | |that period | |2 |Section 820-115 |A reference to subsection | | | |820-85(1) is taken to be a | | | |reference to subsection (1) of | | | |this section | |3 |Section 820-115 |adjusted average debt is taken | | | |to have the meaning given by | | | |subsection (2) of this section | | | |average debt is taken to be the| | | |sum of: | | | |(a) the average value, for that| | | |period, of the entity's *debt | | | |capital that is covered by step| | | |1 of the method statement in | | | |subsection (2) of this section;| | | |and | | | |(b) the average value, for that| | | |period, 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). | Subdivision 820-C-Thin capitalisation rules for inward investing entities (non-ADI) Guide to Subdivision 820-C 820-180 What this Subdivision is about This Subdivision sets out the thin capitalisation rules that apply to a foreign entity or a foreign controlled Australian entity that is not an authorised deposit-taking institution (an ADI). These rules deal with the following matters: . how to work out the entity's maximum allowable debt for an income year; . how all or a part of the debt deductions claimed by the entity may be disallowed if the maximum allowable debt is exceeded; . how to apply these rules to a period that is less than an income year. Table of sections Operative provisions 820-185 Thin capitalisation rule for inward investing entities (non-ADI) 820-190 Maximum allowable debt 820-195 Safe harbour debt amount-inward investment vehicle (general) 820-200 Safe harbour debt amount-inward investment vehicle (financial) 820-205 Safe harbour debt amount-inward investor (general) 820-210 Safe harbour debt amount-inward investor (financial) 820-215 Arm's length debt amount 820-220 Amount of debt deduction disallowed 820-225 Application to part year periods Operative provisions 820-185 Thin capitalisation rule for inward investing entities (non-ADI) Thin capitalisation rule (1) This subsection disallows all or a part of each *debt deduction of an entity for an income year if: (a) the entity is an *inward investing entity (non-ADI) for that year (see subsection (2)), but is not also an *outward investing entity (non-ADI) (see section 820-85) for all or any part of that year; and (b) for that year, the entity's *adjusted average debt (see subsection (3)) exceeds its *maximum allowable debt (see section 820-190). Note 1: This Subdivision does not apply if the total debt deductions of that entity and all its associate entities for that year are $250,000 or less, see section 820-35. Note 2: To work out the amount to be disallowed, see section 820- 220. Note 3: For the rules that apply to an entity that is an outward investing entity (non-ADI) as well as an inward investing entity (non-ADI), see Subdivision 820-B. Note 4: For the rules that apply to an entity that is an inward investing entity (non-ADI) for only a part of an income year, see section 820-225 in conjunction with subsection (2) of this section. Note 5: To calculate an average value for the purposes of this Division, see Subdivision 820-G. Note 6: A consolidated group or MEC group may be an inward investing entity (non-ADI) to which this Subdivision applies: see Subdivisions 820-FA and 820-FB. Inward investing entity (non-ADI) (2) The entity is an inward investing entity (non-ADI) for a period that is all or a part of an income year if, and only if, it is: (a) an *inward investment vehicle (general) for that period (as set out in item 1 of the following table); or (b) an *inward investment vehicle (financial) for that period (as set out in item 2 of that table); or (c) an *inward investor (general) for that period (as set out in item 3 of that table); or (d) an *inward investor (financial) for that period (as set out in item 4 of that table). |Inward investing entity (non-ADI) | |Item |If the entity is a:|and the |the entity is | | | |entity: |an: | |1 |*foreign controlled|is not a |inward | | |Australian entity |*financial |investment | | |throughout a period|entity, nor an|vehicle | | |that is all or a |*ADI, at any |(general) for | | |part of an income |time during |that period | | |year |that period | | |2 |*foreign controlled|is a |inward | | |Australian entity |*financial |investment | | |throughout a period|entity |vehicle | | |that is all or a |throughout |(financial) | | |part of an income |that period |for that | | |year | |period | |3 |*foreign entity |is not a |inward | | |throughout a period|*financial |investor | | |that is all or a |entity, nor an|(general) for | | |part of an income |*ADI, at any |that period | | |year |time during | | | | |that period | | |4 |*foreign entity |is a |inward | | |throughout a period|*financial |investor | | |that is all or a |entity |(financial) | | |part of an income |throughout |for that | | |year |that period |period | Note 1: To determine whether an entity is a foreign controlled Australian entity, see Subdivision 820-H. Note 2: The rules that apply to these 4 types of entities are different in some instances. For example, see sections 820- 195 to 820-210. Note 3: An entity covered by item 3 or 4 of the table may be required to keep certain records, see Subdivision 820-L. Adjusted average debt (3) The entity's adjusted average debt for an income year is the result of applying the method statement in this subsection. Method statement Step 1. Work out the average value, for that year (the relevant year), of all the *debt capital of the entity that gives rise to *debt deductions of the entity for that or any other income year. Step 2. Reduce the result of step 1 by the average value, for the relevant year, of: (a) if the entity is an *inward investment vehicle (general) or an *inward investment vehicle (financial) for that year-all the *associate entity debt of the entity; or (b) if the entity is an *inward investor (general) or an *inward investor (financial) for that year-all the associate entity debt of the entity, to the extent that it is attributable to the entity's *Australian permanent establishments. Step 3. If the entity is a *financial entity throughout the relevant year, add to the result of step 2 the average value, for the relevant year, of the entity's *borrowed securities amount. Step 4. Add to the result of step 3 the average value, for the relevant year, of the *cost-free debt capital of the entity. The result of this step is the adjusted average debt. Note: To calculate an average value for the purposes of this Division, see Subdivision 820-G. (4) The entity's *adjusted average debt does not exceed its *maximum allowable debt if the adjusted average debt is nil or a negative amount. 820-190 Maximum allowable debt The entity's maximum allowable debt for an income year is the greater of the following amounts: (a) the *safe harbour debt amount; (b) the *arm's length debt amount. Note: The safe harbour debt amount differs depending on whether the entity is an inward investment vehicle (general), inward investment vehicle (financial), inward investor (general) or inward investor (financial), see sections 820-195 to 820- 215. 820-195 Safe harbour debt amount-inward investment vehicle (general) If the entity is an *inward investment vehicle (general) for the income year, the safe harbour debt amount is the result of applying the method statement in this section. Method statement Step 1. Work out the average value, for the income year, of all the assets of the entity. Step 1A. Reduce the result of step 1 by the average value, for that year, of all the *excluded equity interests in the entity. Step 2. Reduce the result of step 1A by the average value, for that year, of all the *associate entity debt of the entity. Step 3. Reduce the result of step 2 by the average value, for that year, of all the *associate entity equity of the entity. Step 4. Reduce the result of step 3 by the average value, for that year, of all the *non-debt liabilities of the entity. If the result of this step is a negative amount, it is taken to be nil. Step 5. Multiply the result of step 4 by 3/4. Step 6. Add to the result of step 5 the average value, for that year, of the entity's *associate entity excess amount. The result of this step is the safe harbour debt amount. Example: ALWZ Ltd, a company that is an Australian entity, has an average value of assets of $100 million. The average values of its associate entity debt, associate entity equity and non-debt liabilities are $10 million, $5 million and $5 million respectively. Deducting these amounts from the result of step 1 (through applying steps 2 to 4) leaves $80 million. Multiplying $80 million by 3/4 results in $60 million. As the average value of the company's associate entity excess amount is $2 million, the safe harbour debt amount is therefore $62 million. 820-200 Safe harbour debt amount-inward investment vehicle (financial) (1) If the entity is an *inward investment vehicle (financial) for the income year, the safe harbour debt amount is the lesser of the following amounts: (a) the *total debt amount (worked out under subsection (2)); (b) the *adjusted on-lent amount (worked out under subsection (3)). However, if the 2 amounts are equal, it is the total debt amount. Total debt amount (2) The total debt amount is the result of the method statement in this subsection. Method statement Step 1. Work out the average value, for the income year, of all the assets of the entity. Step 1A. Reduce the result of step 1 by the average value, for that year, of all the *excluded equity interests in the entity. Step 2. Reduce the result of step 1A by the average value, for that year, of all the *associate entity debt of the entity. Step 3. Reduce the result of step 2 by the average value, for that year, of all the *associate entity equity of the entity. Step 4. Reduce the result of step 3 by the average value, for that year, of all the *non-debt liabilities of the entity. Step 5. Reduce the result of step 4 by the average value, for that year, of the entity's *zero-capital amount. If the result of this step is a negative amount, it is taken to be nil. Step 6. Multiply the result of step 5 by 20/21. Step 7. Add to the result of step 6 the average value, for that year, of the entity's *zero-capital amount. Step 8. Add to the result of step 7 the average value, for that year, of the entity's *associate entity excess amount. The result of this step is the total debt amount. Example: KJW Finance Pty Ltd, a company that is an Australian entity, has an average value of assets of $120 million. The average values of its associate entity debt, associate entity equity, its non-debt liabilities and its zero-capital amount are $5 million, $3 million, $2 million and $5 million respectively. Deducting these amounts from the result of step 1 (through applying steps 2 to 5) leaves $105 million. Multiplying $105 million by 20/21 results in $100 million. Adding the zero-capital amount of $5 million to $100 million results in $105 million. As the company does not have any associate entity excess amount, the total debt amount is therefore $105 million. Adjusted on-lent amount (3) The adjusted on-lent amount is the result of applying the method statement in this subsection. Method statement Step 1. Work out the average value, for the income year, of all the assets of the entity. Step 1A. Reduce the result of step 1 by the average value, for that year, of all the *excluded equity interests in the entity. Step 2. Reduce the result of step 1A by the average value, for that year, of all the *associate entity equity of the entity. Step 3. Reduce the result of step 2 by the average value, for that year, of all the *non-debt liabilities of the entity. Step 4. Reduce the result of step 3 by the amount (the average on- lent amount) which is the average value, for that year, of the entity's *on-lent amount. If the result of this step is a negative amount, it is taken to be nil. Step 5. Multiply the result of step 4 by 3/4. Step 6. Add to the result of step 5 the average on-lent amount. Step 7. Reduce the result of step 6 by the average value, for that year, of all the *associate entity debt of the entity. Step 8. Add to the result of step 7 the average value, for that year, of the entity's *associate entity excess amount. The result of this step is the adjusted on-lent amount. Example: KJW Finance Pty Ltd, a company that is an Australian entity, has an average value of assets of $120 million. The average values of its associate entity equity, non-debt liabilities and on-lent amount are $3 million, $2 million and $35 million respectively. Deducting these amounts from the result of step 1 (through applying steps 2 to 4) leaves $80 million. Multiplying $80 million by 3/4 results in $60 million. Adding the average on-lent amount of $35 million results in $95 million. Reducing $95 million by the associate entity debt amount of $5 million results in $90 million. As the company does not have any associate entity excess amount, the adjusted on-lent amount is therefore $90 million. 820-205 Safe harbour debt amount-inward investor (general) If the entity is an *inward investor (general) for the income year, the safe harbour debt amount is the result of applying the method statement in this section. Method statement Step 1. Work out the average value, for the income year, of all of the following assets of the entity (the Australian investments): (a) assets that are attributable to the entity's *Australian permanent establishments; (b) other assets that are held for the purposes of producing the entity's assessable income. Step 1A. Reduce the result of step 1 by the average value, for that year, of all the *excluded equity interests in the entity. Step 2. Reduce the result of step 1A by the average value, for that year, of all the *associate entity debt of the entity that has arisen because of the Australian investments. Step 3. Reduce the result of step 2 by the average value, for that year, of all the *associate entity equity of the entity that has arisen because of the Australian investments. Step 4. Reduce the result of step 3 by the average value, for that year, of all the *non-debt liabilities of the entity that have arisen because of the Australian investments. If the result of this step is a negative amount, it is taken to be nil. Step 5. Multiply the result of step 4 by 3/4. Step 6. Add to the result of step 5 the average value, for that year, of the entity's *associate entity excess amount. The result of this step is the safe harbour debt amount. Example: RJ Corporation is a company that is not an Australian entity. The average value of its Australian investments is $100 million. The average value of its relevant associate entity debt, associate entity equity and non-debt liabilities is $10 million, $5 million and $5 million respectively. Deducting those amounts from the result of step 1 leaves $80 million. Multiplying $80 million by 3/4 results in $60 million. As the company does not have any associate entity excess amount, the safe harbour debt amount is therefore $60 million. 820-210 Safe harbour debt amount-inward investor (financial) (1) If the entity is an *inward investor (financial) for that year, the safe harbour debt amount is the lesser of the following amounts: (a) the *total debt amount (worked out under subsection (2)); (b) the *adjusted on-lent amount (worked out under subsection (3)). However, if the 2 amounts are equal, it is the total debt amount. Total debt amount (2) The total debt amount is the result of applying the method statement in this subsection. Method statement Step 1. Work out the average value, for the income year, of all of the following assets of the entity (the Australian investments): (a) assets that are attributable to the entity's *Australian permanent establishments; (b) other assets that are held for the purposes of producing the entity's assessable income. Step 1A. Reduce the result of step 1 by the average value, for that year, of all the *excluded equity interests in the entity. Step 2. Reduce the result of step 1A by the average value, for that year, of all the *associate entity debt of the entity that has arisen because of the Australian investments. Step 3. Reduce the result of step 2 by the average value, for that year, of all the *associate entity equity of the entity that has arisen because of the Australian investments. Step 4. Reduce the result of step 3 by the average value, for that year, of all the *non-debt liabilities of the entity that have arisen because of the Australian investments. Step 5. Reduce the result of step 4 by the average value, for that year, of the entity's *zero-capital amount that has arisen because of the Australian investments. If the result of this step is a negative amount, it is taken to be nil. Step 6. Multiply the result of step 5 by 20/21. Step 7. Add to the result of step 6 the average value, for that year, of the entity's *zero-capital amount that has arisen because of the Australian investments. Step 8. Add to the result of step 7 the average value, for that year, of the entity's *associate entity excess amount. The result of this step is the total debt amount. Example: FXS Financial SA is a company that is not an Australian entity. The average value of its Australian investments is $120 million. The average value of its relevant associate entity debt, associate entity equity, non-debt liabilities and zero- capital amount are $5 million, $2 million, $3 million and $5 million respectively. Deducting those amounts from the result of step 1 (through applying steps 2 to 5) leaves $105 million. Multiplying $105 million by 20/21 results in $100 million. Adding the average zero-capital amount of $5 million results in $105 million. As the company does not have any associate entity excess amount, the total debt amount is therefore $105 million. Adjusted on-lent amount (3) The adjusted on-lent amount is the result of applying the method statement in this subsection. Method statement Step 1. Work out the average value, for the income year, of all of the following assets of the entity (the Australian investments): (a) assets that are attributable to the entity's *Australian permanent establishments; (b) other assets that are held for the purposes of producing the entity's assessable income. Step 1A. Reduce the result of step 1 by the average value, for that year, of all the *excluded equity interests in the entity. Step 2. Reduce the result of step 1A by the average value, for that year, of all the *associate entity equity of the entity that has arisen because of the Australian investments. Step 3. Reduce the result of step 2 by the average value, for that year, of all the *non-debt liabilities of the entity that has arisen because of the Australian investments. Step 4. Reduce the result of step 3 by the amount (the average on- lent amount) which is the average value, for that year, of the *on-lent amount of the entity (to the extent that it is the value of all or a part of the Australian investments). If the result of this step is a negative amount, it is taken to be nil. Step 5. Multiply the result of step 4 by 3/4. Step 6. Add to the result of step 5 the average on-lent amount. Step 7. Reduce the result of step 6 by the average value, for that year, of all the *associate entity debt of the entity that has arisen because of the Australian investments. If the result of this step is a negative amount, it is taken to be nil. Step 8. Add to the result of step 7 the average value, for that year, of the entity's *associate entity excess amount. The result of this step is the adjusted on-lent amount. Example: FXS Financial SA is a company that is not an Australian entity. The average value of its Australian investments is $120 million. The average value of its relevant associate entity equity, non- debt liabilities and on-lent amount are $2 million, $3 million and $35 million respectively. Deducting those amounts from the result of step 1 (through applying steps 2 to 4) leaves $80 million. Multiplying $80 million by 3/4 results in $60 million. Adding the average on-lent amount of $35 million results in $95 million. Reducing the result of step 6 by the associate entity debt amount of $5 million results in $90 million. As the company does not have any associate entity excess amount, the adjusted on-lent amount is therefore $90 million. 820-215 Arm's length debt amount (1) The arm's length debt amount is a notional amount that, having regard to the factual assumptions set out in subsection (2) and the relevant factors mentioned in subsection (3), would satisfy both paragraphs (a) and (b): (a) the amount represents a notional amount of *debt capital that: (i) the entity would reasonably be expected to have throughout the income year; and (ii) would give rise to an amount of *debt deductions of the entity for that or any other income year; and (iii) would be attributable to the entity's Australian business as mentioned in subsection (2); (b) commercial lending institutions that were not *associates of the entity (the notional lenders) would reasonably be expected to have entered into *schemes that would: (i) give rise to *debt interests that constituted that notional amount of debt capital of the entity; and (ii) provide for terms and conditions for the debt interests that would reasonably be expected to have applied if the entity and the notional lenders had been dealing at arm's length with each other throughout the income year mentioned in subparagraph (1)(a)(i). Note: The entity must keep records in accordance with section 820-980 if the entity works out an amount under this section. Factual assumptions (2) Irrespective of what actually happened during that year, the following assumptions must be made in working out that amount: (a) the entity's commercial activities in connection with Australia (the Australian business) during that year: (i) if the entity is an *inward investment vehicle (general) or *inward investment vehicle (financial) for that year-do not include the holding of any *associate entity debt; and (ii) if the entity is an *inward investor (general) or *inward investor (financial) for that year-consist only of its Australian investments (within the meaning of section 820- 205 or 820-210, as appropriate), other than the holding of any associate entity debt that is attributable to its *Australian permanent establishments; (b) the entity had carried on the Australian business that it actually carried on during that year; (c) the nature of the entity's assets and liabilities (to the extent that they are attributable to the Australian business) had been as they were during that year; (d) except as stated in paragraph (1)(b) and paragraphs (e), (f) and (g) of this subsection, the entity had carried on the Australian business in the same circumstances as what actually existed during that year; (e) any guarantee, security or other form of credit support provided to the entity in relation to the Australian business during that year: (i) by its *associates; or (ii) by the use of assets of the entity that are attributable to the entity's overseas permanent establishments; is taken not to have been received by the entity; (f) the entity's only activities during that year were the Australian business; (g) the entity's only assets and liabilities during that year were those referred to in paragraph (c) of this subsection. However, the assumptions set out in paragraphs (f) and (g) of this subsection are not to be made in taking into account the relevant factors mentioned in subsection (3). Relevant factors (3) On the basis of the factual assumptions set out in subsection (2), the following factors must be taken into account in determining whether or not an amount satisfies paragraphs (1)(a) and (b): (a) the functions performed, the assets used, and the risks assumed, by the entity in relation to the Australian business throughout that year; (b) the terms and conditions of the *debt capital that the entity actually had in relation to the Australian business throughout that year; (c) the nature of, and title to, any assets of the entity attributable to the Australian business that were available to the entity throughout that year as security for its debt capital for that business; (d) the purposes for which *schemes for debt capital had been actually entered into by the entity in relation to the Australian business throughout that year; (e) the entity's capacity to meet all its liabilities in relation to the Australian business (whether during that year or at any other time); (f) the profit of the entity (within the meaning of the *accounting standards), and the return on its capital, in relation to the Australian business (whether during that year or at any other time); (g) the debt to equity ratios of the following throughout that year: (i) the entity; (ii) the entity in relation to the Australian business; (iii) each of the entity's *associate entities that engage in commercial activities similar to the Australian business; (h) the commercial practices adopted by independent parties dealing with each other at arm's length in the industry in which the entity carries on the Australian business throughout that year (whether in Australia or in comparable markets elsewhere); (i) the general state of the Australian economy throughout that year; (j) all of the above factors existing at the time when the entity last entered into a *scheme that gave rise to an actual *debt interest attributable to the Australian business that remains *on issue throughout that year; (k) any other factors which are specified in the regulations made for the purposes of this section, including factors that are specific to an *inward investment vehicle (general), an *inward investment vehicle (financial), an *inward investor (general) or an *inward investor (financial). Commissioner's power (4) If the Commissioner considers an amount worked out by the entity under this section does not appropriately take into account the factual assumptions and the relevant factors, the Commissioner may substitute another amount that the Commissioner considers better reflects those assumptions and factors. 820-220 Amount of debt deduction disallowed The amount of *debt deduction disallowed under subsection 820- 185(1) is worked out using the following formula: [pic] where: 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. debt deduction means each *debt deduction of the entity for that year. excess debt means the amount by which the *adjusted average debt (see subsection 820-185(3)) exceeds the entity's *maximum allowable debt for that year. Note: The disallowed amount also does not form part of the cost base of a CGT asset. See section 110-54. 820-225 Application to part year periods (1) This subsection disallows all or a part of each *debt deduction of an entity for an income year that is an amount incurred by the entity during a period that is a part of that year, if: (a) the entity is an *inward investing entity (non-ADI) for that period, but is not also an *outward investing entity (non-ADI) for all or any part of that period; and (b) the entity's *adjusted average debt for that period exceeds the entity's *maximum allowable debt for that period. Note: To determine whether an entity is an inward investing entity (non-ADI) for a period, see subsection 820-185(2). (2) The entity's adjusted average debt for that period is the result of applying the method statement in this subsection. Method statement Step 1. Work out the average value, for that period, of all the *debt capital of the entity that gives rise to *debt deductions of the entity for that or any other income year. Step 2. Reduce the result of step 1 by the average value, for that period, of: (a) if the entity is an *inward investment vehicle (general) or an *inward investment vehicle (financial) for that period-all the *associate entity debt of the entity; or (b) if the entity is an *inward investor (general) or an *inward investor (financial) for that period-all the associate entity debt of the entity, to the extent that it is attributable to the entity's *Australian permanent establishments. Step 3. If the entity is a *financial entity throughout that period, add to the result of step 2 the average value, for that period, of the entity's *borrowed securities amount. Step 4. Add to the result of step 3 the average value, for that period, of the *cost-free debt capital of the entity. The result of this step is the adjusted average debt. Note: To calculate an average value for the purposes of this Division, see Subdivision 820-G. (2A) The entity's *adjusted average debt does not exceed its *maximum allowable debt if the adjusted average debt is nil or a negative amount. (3) For the purposes of determining: (a) the *maximum allowable debt for the period mentioned in subsection (1); and (b) the amount of each *debt deduction to be disallowed; sections 820-190 to 820-220 apply in relation to that entity and that period with the modifications set out in the following table: |Modifications of sections 820-190 to 820-220 | |Item |Provisions |Modifications | |1 |Sections 820-190 |A reference to an income year | | |to 820-220 |is taken to be a reference to | | | |that period | |2 |Section 820-220 |A reference to subsection | | | |820-185(1) is taken to be a | | | |reference to subsection (1) of | | | |this section | |3 |Section 820-220 |adjusted average debt is taken | | | |to have the meaning given by | | | |subsection (2) of this section | | | |average debt is taken to be the| | | |sum of: | | | |(a) the average value, for that| | | |period, of the entity's *debt | | | |capital that is covered by step| | | |1 of the method statement in | | | |subsection (2) of this section;| | | |and | | | |(b) the average value, for that| | | |period, of the entity's | | | |*cost-free debt capital that is| | | |covered by step 4 of that | | | |method statement. | Subdivision 820-D-Thin capitalisation rules for outward investing entities (ADI) Guide to Subdivision 820-D 820-295 What this Subdivision is about This Subdivision sets out the thin capitalisation rules that apply to an entity that is both an authorised deposit-taking institution (an ADI) and an Australian entity that has certain types of overseas investments. These rules deal with the following matters: . how to work out the entity's minimum capital amount for an income year; . how all or a part of the debt deductions claimed by the entity may be disallowed if the minimum capital amount is not reached; . how to apply these rules to a period that is less than an income year. Table of sections Operative provisions 820-300 Thin capitalisation rule for outward investing entities (ADI) 820-305 Minimum capital amount 820-310 Safe harbour capital amount 820-315 Arm's length capital amount 820-320 Worldwide capital amount 820-325 Amount of debt deduction disallowed 820-330 Application to part year periods Operative provisions 820-300 Thin capitalisation rule for outward investing entities (ADI) Thin capitalisation rule (1) This subsection disallows all or a part of each *debt deduction of an entity for an income year (to the extent that it is not attributable to an *overseas permanent establishment of the entity) if, for that year: (a) the entity is an *outward investing entity (ADI) (see subsection (2)); and (b) the entity's *adjusted average equity capital (see subsection (3)) is less than the entity's *minimum capital amount (see section 820-305). Note 1: This Subdivision does not apply if the total debt deductions of that entity and all its associate entities for that year are $250,000 or less, see section 820-35. Note 2: To work out the amount to be disallowed, see section 820- 325. Note 3: For the rules that apply to an entity that is an outward investing entity (ADI) for only part of an income year, see section 820-330 in conjunction with subsection (2) of this section. Note 4: A consolidated group or MEC group may be an outward investing entity (ADI) to which this Subdivision applies: see Subdivisions 820-FA and 820-FB. Outward investing entity (ADI) (2) The entity is an outward investing entity (ADI) for a period that is all or a part of an income year if, and only if, throughout that period, the entity is an *ADI to which at least one of the following paragraphs applies: (a) the entity is an *Australian controller of at least one *Australian controlled foreign entity (not necessarily the same Australian controlled foreign entity throughout that period); (b) the entity is an *Australian entity that carries on a *business at or through at least one *overseas permanent establishment (not necessarily the same permanent establishment throughout that period); (c) the entity is: (i) an Australian entity; and (ii) an *associate entity of another entity that is an *outward investing entity (non-ADI) or an *outward investing entity (ADI) for that period. Note: To determine whether an entity is an Australian controller of an Australian controlled foreign entity, see Subdivision 820-H. Adjusted average equity capital (3) The entity's adjusted average equity capital for an income year is: (a) the average value, for that year, of all the *ADI equity capital of the entity (other than ADI equity capital attributable to its *overseas permanent establishments); minus (b) the average value, for that year, of all the *controlled foreign entity equity of the entity (other than controlled foreign entity equity attributable to its overseas permanent establishments). Note: To calculate an average value for the purposes of this Division, see Subdivision 820-G. 820-305 Minimum capital amount The entity's minimum capital amount for an income year is the least of the following amounts: (a) the *safe harbour capital amount; (b) the *arm's length capital amount; (c) the *worldwide capital amount. Note: The entity cannot use the worldwide capital amount if the entity is also a foreign controlled Australian entity throughout that year, see section 820-320. 820-310 Safe harbour capital amount The safe harbour capital amount is the result of applying the method statement in this section. Method statement Step 1. Work out the average value, for the income year, of all the *risk-weighted assets of the entity, other than risk- weighted assets attributable to any of the following: (a) the entity's *overseas permanent establishments; (b) assets comprised by the *controlled foreign entity equity of the entity (other than controlled foreign entity equity attributable to the entity's overseas permanent establishments); (c) assets for which *prudential capital deductions must be made by the entity (other than prudential capital deductions attributable to the entity's overseas permanent establishments). Step 2. Multiply the result of step 1 by 4%. Step 3. Add to the result of step 2 the average value, for that year, of all the *tier 1 prudential capital deductions for the entity (to the extent that they are not attributable to any of the entity's *overseas permanent establishments or any *Australian controlled foreign entities of which the entity is an *Australian controller). The result of this step is the safe harbour capital amount. Example: The Southern Cross Bank is an Australian bank that carries on its banking business through its overseas permanent establishments and through foreign entities that it controls. For the income year, its average value of risk- weighted assets is $150 million (having discounted those risk-weighted assets that are excluded by step 1) and the average value of its relevant tier 1 prudential capital deductions is $2 million. Multiplying $150 million by 4% equals $6 million, which is the result of step 2. Adding $2 million to $6 million equals $8 million, which is the safe harbour capital amount. 820-315 Arm's length capital amount (1) The arm's length capital amount is a notional amount that, having regard to: (a) the factual assumptions set out in subsection (2); and (b) the relevant factors mentioned in subsection (3); would represent the minimum amount of *equity capital that the entity would reasonably be expected to have in carrying on the Australian business mentioned in subsection (2) throughout the income year if, throughout that year: (c) the part of the entity carrying on that business had operated as if it were a separate entity; and (d) that separate entity had been dealing at arm's length with: (i) the other part of the entity; and (ii) all the *Australian controlled foreign entities of which the entity is an *Australian controller. Note: The entity must keep records in accordance with section 820-980 if the entity works out an amount under this section. Factual assumptions (2) Irrespective of what actually happened during that year, the following assumptions must be made in working out that minimum amount: (a) the entity's commercial activities in connection with Australia (the Australian business) during that year do not include: (i) any *business carried on by the entity at or through its *overseas permanent establishments; or (ii) the holding of any *controlled foreign entity equity; (b) the entity had carried on the Australian business that it actually carried on during that year; (c) the nature of the entity's assets and liabilities (to the extent that they are attributable to the Australian business) had been as they were during that year; (d) except as mentioned in subsection (1), the entity had carried on the Australian business in the same circumstances as what actually existed during that year. Relevant factors (3) On the basis of the factual assumptions set out in subsection (2), the following factors must be taken into account in determining that minimum amount: (a) the functions performed, the assets used, and the risks assumed, throughout that year, by: (i) the entity; and (ii) the entity in relation to the Australian business; (b) the credit rating of the entity throughout that year, including the effect of that credit rating on all of the following: (i) the entity's ability to borrow in relation to the Australian business; (ii) the interest rate at which the entity borrowed in relation to that business; (iii) the entity's gross profit margin in relation to that business; (c) the capital ratios of the following throughout that year: (i) the entity; (ii) the entity in relation to the Australian business; (iii) each of the entity's *associate entities that engage in commercial activities similar to the Australian business; (d) the purposes for which *schemes for *debt capital and for *equity capital had been actually entered into, throughout that year, by: (i) the entity; and (ii) the entity in relation to the Australian business; (e) the profit (within the meaning of the *accounting standards), and the return on capital, whether during that year or at any other time, of: (i) the entity; and (ii) the entity in relation to the Australian business; (f) the commercial practices adopted by independent parties dealing with each other at arm's length in the industry in which the entity carries on the Australian business throughout that year (whether in Australia or in comparable markets elsewhere); (g) the way in which the entity financed its business (other than the Australian business) throughout that year; (h) the general state of the Australian economy throughout that year; (i) any other factors which are specified in the regulations made for the purposes of this section. Commissioner's power (4) If the Commissioner considers an amount worked out by the entity under this section does not appropriately take into account the factual assumptions and the relevant factors, the Commissioner may substitute another amount that the Commissioner considers better reflects those assumptions and factors. 820-320 Worldwide capital amount (1) This section only applies if the entity is not also a *foreign controlled Australian entity throughout the income year. (2) The worldwide capital amount is the result of applying the method statement in this subsection. Method statement Step 1. Work out the average value, for the income year, of all the *risk-weighted assets of the entity, other than risk- weighted assets attributable to any of the following: (a) the entity's *overseas permanent establishments; (b) assets comprised by the *controlled foreign entity equity of the entity; (c) assets for which *prudential capital deductions must be made by the entity. Step 2. Multiply the entity's worldwide group capital ratio for that year (see subsection (3)) by 8/10. Step 3. Multiply the result of step 1 by the result of step 2. Step 4. Add to the result of step 3 the average value, for that year, of all the *tier 1 prudential capital deductions for the entity (to the extent that they are not attributable to any of the entity's *overseas permanent establishments or to any *Australian controlled foreign entities of which the entity is an *Australian controller). The result of this step is the worldwide capital amount. Example: Southern Cross Bank has an average value of risk-weighted assets of $150 million (having discounted those risk- weighted assets that are excluded by step 1) and the average value of its relevant tier 1 prudential capital deductions is $2 million. The entity's worldwide group capital ratio is 0.0875. Multiplying that ratio by 8/10 equals 0.07, which is the result of step 2. Multiplying $150 million by 0.07 equals $10.5 million, which is the result of step 3. Adding that amount to the average value of the relevant tier 1 prudential capital deductions equals $12.5 million, which is the worldwide capital amount. Worldwide group capital ratio (3) The entity's worldwide group capital ratio for the income year is the result of applying the method statement in this subsection. Method statement Step 1. Work out the average value, for the income year, of the tier 1 capital (within the meaning of the *prudential standards) of the consolidated group of which the entity is a member (within the meaning of those standards) in accordance with those standards. Step 2. Divide the result of step 1 by the average value, for that year, of the *risk-weighted assets of that group in accordance with the *prudential standards. The result is the worldwide group capital ratio. Example: For the Southern Cross Bank, the average value of the tier 1 capital for the relevant consolidated group is $14 million. Dividing $14 million by the group's risk weighted assets of $160 million equals 0.0875, which is the worldwide group capital ratio. 820-325 Amount of debt deduction disallowed The amount of *debt deduction disallowed under subsection 820- 300(1) is worked out using the following formula: [pic] where: average debt means the average value, for the income year, of all the *debt capital of the entity that gives rise to *debt deductions of the entity for that or any other income year (other than any debt capital that is attributable to any of the entity's *overseas permanent establishments). capital shortfall means the amount by which the *adjusted average equity capital of the entity for that year (see subsection 820- 300(3)) is less than the entity's *minimum capital amount for that year. debt deduction means each *debt deduction covered by subsection 820- 300(1). Note: The disallowed amount also does not form part of the cost base of a CGT asset. See section 110-54. 820-330 Application to part year periods (1) This subsection disallows all or a part of each *debt deduction of an entity for an income year that is an amount incurred by the entity during a period that is a part of that year (to the extent that it is not attributable to an *overseas permanent establishment of the entity) if, for that period: (a) the entity is an *outward investing entity (ADI); and (b) the *adjusted average equity capital of the entity is less than the entity's *minimum capital amount. Note: To determine whether an entity is an outward investing entity (non-ADI) for that period, see subsection 820-300(2). (2) The entity's adjusted average equity capital for that period is: (a) the average value, for that period, of all the *ADI equity capital of the entity (other than ADI equity capital attributable to any of its *overseas permanent establishments); minus (b) the average value, for that period, of all the *controlled foreign entity equity of the entity (other than controlled foreign entity equity attributable to any of its overseas permanent establishments). (3) For the purposes of determining: (a) the entity's *minimum capital amount for that period; and (b) the amount of each *debt deduction to be disallowed; sections 820-305 to 820-325 apply in relation to that entity and that period with the modifications set out in the following table: |Modifications of sections 820-305 to 820-325 | |Item |Provisions |Modifications | |1 |Sections 820-305 |A reference to an income year | | |to 820-325 |is taken to be a reference to | | | |that period | |2 |Section 820-325 |A reference to subsection | | | |820-300(1) is taken to be a | | | |reference to subsection (1) of | | | |this section | |3 |Section 820-325 |adjusted average equity capital| | | |has the meaning given by | | | |subsection (2) of this section | | | |average debt is taken to be the| | | |average value, for that period,| | | |of all the *debt capital of the| | | |entity that gives rise to *debt| | | |deductions of the entity for | | | |that or any other income year, | | | |to the extent that the debt | | | |capital is not attributable to | | | |any of the entity's *overseas | | | |permanent establishments | Subdivision 820-E-Thin capitalisation rules for inward investing entities (ADI) Guide to Subdivision 820-E 820-390 What this Subdivision is about This Subdivision applies to a foreign entity that is an authorised deposit-taking institution (an ADI). These rules deal with the following matters: . how to work out the entity's minimum capital amount for an income year; . how all or a part of the debt deductions claimed by the entity may be disallowed if the minimum capital amount is not reached; . how to apply these rules to a period that is less than an income year. Table of sections Operative provisions 820-395 Thin capitalisation rule for inward investing entities (ADI) 820-400 Minimum capital amount 820-405 Safe harbour capital amount 820-410 Arm's length capital amount 820-415 Amount of debt deduction disallowed 820-420 Application to part year periods Operative provisions 820-395 Thin capitalisation rule for inward investing entities (ADI) Thin capitalisation rule (1) This subsection disallows all or a part of each *debt deduction of an entity for an income year if, for that year: (a) the entity is an *inward investing entity (ADI) (see subsection (2)); and (b) the entity's *average equity capital (see subsection (3)) is less than its *minimum capital amount (see section 820-400); to the extent that the debt deduction: (c) is attributable to an *Australian permanent establishment of the entity at or through which it carries on its banking business; and (d) is not an *allowable OB deduction. Note 1: This Subdivision does not apply if the total debt deductions of that entity and all its associate entities for that year are $250,000 or less, see section 820-35. Note 2: To work out the amount to be disallowed, see section 820- 415. Note 3: For the rules that apply to an entity that is an inward investing entity (ADI) for part of an income year, see section 820-420 in conjunction with subsection (2) of this section. Note 4: A consolidated group or MEC group may be an inward investing entity (ADI) to which this Subdivision applies: see Subdivision 820-FB. Inward investing entity (ADI) (2) The entity is an inward investing entity (ADI) for a period that is all or a part of an income year if, and only if, throughout that period, the entity is a *foreign bank that carries on its banking business in Australia at or through one or more of its *Australian permanent establishments. Note: The entity is required to keep certain records, see Subdivision 820-L. Average equity capital (3) The entity's average equity capital for an income year is the sum of the following: (a) the average value, for that year, of the *ADI equity capital of the entity that: (i) is attributable to the *Australian permanent establishments at or through which it carries on its banking business in Australia; but (ii) has not been allocated to the *OB activities of the Australian permanent establishments; (b) the average value, for that year, of the total amounts that: (i) are made available by the entity to the Australian permanent establishments of the entity as loans to the Australian permanent establishments; and (ii) do not give rise to any *debt deductions of the entity for that or any other income year. Note: To calculate an average value for the purposes of this Division, see Subdivision 820-G. 820-400 Minimum capital amount The entity's minimum capital amount for an income year is the lesser of the following amounts: (a) the *safe harbour capital amount; (b) the *arm's length capital amount. 820-405 Safe harbour capital amount The entity's safe harbour capital amount for the income year is the result of applying the method statement in this section. Method statement Step 1. Work out the average value, for the income year, of that part of the *risk-weighted assets of the entity that: (a) is attributable to the *Australian permanent establishments at or through which it carries on its banking business in Australia; but (b) is not attributable to the *OB activities of the Australian permanent establishments. Step 2. Multiply the result of step 1 by 4%. The result of this step is the safe harbour capital amount. Example: The Global Bank is a foreign bank that carries on its banking business in Australia through a permanent establishment. The average value of its relevant risk- weighted assets is $140 million. Multiplying that amount by 4% results in $5.6 million, which is the safe harbour capital amount. 820-410 Arm's length capital amount (1) The arm's length capital amount is a notional amount that, having regard to: (a) the factual assumptions set out in subsection (2); and (b) the relevant factors mentioned in subsection (3); would represent the minimum amount of *equity capital that the entity would reasonably be expected to have in carrying on the Australian business mentioned in subsection (2) throughout the income year if, throughout that year: (c) the part of the entity carrying on that business had operated as if it were a separate entity; and (d) that separate entity had been dealing at arm's length with the other part of the entity. Note: The entity must keep records in accordance with section 820-980 if the entity works out an amount under this section. Factual assumptions (2) Irrespective of what actually happened during that year, the following assumptions must be made in working out that minimum amount: (a) the entity's commercial activities in connection with Australia (the Australian business) during that year consist only of banking business attributable to its *Australian permanent establishments (other than its *OB activities); (b) the entity had carried on the Australian business that it actually carried on during that year; (c) the nature of the entity's assets and liabilities (to the extent that they are attributable to the Australian business) had been as they were during that year; (d) except as mentioned in subsection (1), the entity had carried on the Australian business in the same circumstances as what actually happened during that year. Relevant factors (3) On the basis of the factual assumptions set out in subsection (2), the following factors must be taken into account in determining that minimum amount: (a) the functions performed, the assets used, and the risks assumed, throughout that year, by: (i) the entity; and (ii) the entity in relation to the Australian business; (b) the credit rating of the entity throughout that year, including the effect of that credit rating on all of the following: (i) the entity's ability to borrow in relation to the Australian business; (ii) the interest rate at which the entity borrowed in relation to that business; (iii) the entity's gross profit margin in relation to that business; (c) the capital ratios of the following throughout that year: (i) the entity; (ii) the entity in relation to the Australian business; (iii) each of the entity's *associate entities that engage in commercial activities similar to the Australian business; (d) the purposes for which *schemes for *debt capital and for *equity capital had been actually entered into, throughout that year, by: (i) the entity; and (ii) the entity in relation to the Australian business; (e) the profit (within the meaning of the *accounting standards or any other accounting standards that would otherwise apply to the entity), and the return on capital, whether during that year or at any other time, of: (i) the entity; and (ii) the entity in relation to the Australian business; (f) the commercial practices adopted by independent parties dealing with each other at arm's length in the industry in which the entity carries on the Australian business throughout that year (whether in Australia or in comparable markets elsewhere); (g) the general state of the Australian economy throughout that year; (h) any other factors which are specified in the regulations made for the purposes of this section. Commissioner's power (4) If the Commissioner considers an amount worked out by the entity under this section does not appropriately take into account the factual assumptions and the relevant factors, the Commissioner may substitute another amount that the Commissioner considers better reflects those assumptions and factors. 820-415 Amount of debt deduction disallowed The amount of *debt deduction disallowed under subsection 820- 395(1) is worked out using the following formula: [pic] where: average debt means the average value, for the income year, of all the *debt capital of the entity that gives rise to *debt deductions of the entity (other than *allowable OB deductions) for that or any other income year. capital shortfall means the amount by which the entity's *average equity capital for that year (see subsection 820-395(3)) is less than the entity's *minimum capital amount for that year. debt deduction means each *debt deduction of the entity (other than *allowable OB deduction) for the income year. Note: The disallowed amount also does not form part of the cost base of a CGT asset. See section 110-54. 820-420 Application to part year periods (1) This subsection disallows all or a part of each *debt deduction of an entity for an income year that is an amount incurred by the entity during a period that is a part of that year if, for that period: (a) the entity is an *inward investing entity (ADI); and (b) the entity's *average equity capital is less than its *minimum capital amount; to the extent that the debt deduction: (c) is attributable to an *Australian permanent establishment of the entity at or through which it carries on its banking business; and (d) is not an *allowable OB deduction. Note: To determine whether an entity is an inward investing entity (ADI) for that period, see subsection 820-395(2). (2) The entity's average equity capital for that period is the sum of the following: (a) the average value, for that period, of the *equity capital of the entity that: (i) is attributable to its *Australian permanent establishments at or through which it carries on its banking business in Australia; but (ii) has not been allocated to the *OB activities of the Australian permanent establishments; (b) the average value, for that period, of the total amounts that: (i) are made available by the entity to the Australian permanent establishments of the entity as loans to the Australian permanent establishments; and (ii) do not give rise to any *debt deductions of the entity for that or any other income year. (3) For the purposes of determining: (a) the entity's *minimum capital amount for that period; and (b) the amount of each *debt deduction to be disallowed; sections 820-400 to 820-415 apply in relation to that entity and that period with the modifications set out in the following table: |Modifications of sections 820-400 to 820-415 | |Item |Provisions |Modifications | |1 |Sections 820-400 |A reference to an income year | | |to 820-415 |is taken to be a reference to | | | |that period | |2 |Section 820-415 |The reference to subsection | | | |820-395(1) is taken to be a | | | |reference to subsection (1) of| | | |this section | |3 |Section 820-415 |average debt is taken to be | | | |the average value, for that | | | |period, of all the *debt | | | |capital of the entity that | | | |gives rise to its *debt | | | |deductions (other than | | | |*allowable OB deductions) for | | | |that year that are amounts | | | |incurred by the entity during | | | |that period | | | |average equity capital has the| | | |meaning given by | | | |subsection (2) of this section| Subdivision 820-EA-Some financial entities may choose to be treated as ADIs Table of sections 820-430 When choice can be made, and what effect it has 820-435 Conditions 820-440 Revocation of choice 820-445 How this Subdivision interacts with Subdivision 820-FA 820-430 When choice can be made, and what effect it has (1) An entity may choose to be treated, for the purposes of this Division (except this Subdivision), as set out in the table. However, the entity can make the choice only if subsection (5) is satisfied. |Choice by financial entity to be treated as an ADI | | |Column 1 |Column 2 | |Item |For a period that the |The entity is treated as| | |choice covers, and for |if it had instead been: | | |which the entity would, | | | |apart from this | | | |Subdivision, have been: | | |1 |an *outward investor |an *outward investing | | |(financial) |entity (ADI) | |2 |an *inward investor |an *inward investing | | |(financial) |entity (ADI) | |3 |an *inward investment |an *outward investing | | |vehicle (financial) |entity (ADI) | (2) The choice: (a) has effect accordingly, except as provided in subsection (4); and (b) ceases to have effect only as provided in this Subdivision; and (c) covers each period: (i) that started on or after a day specified in the choice (or on the day the choice is made if no day is specified); and (ii) that is all or part of an income year. (3) Subdivision 820-E applies to the entity, in relation to a period for which this section treats it as an *inward investing entity (ADI), as if all the entity's *business were banking business of the entity. (4) The choice does not have effect for the purposes of determining whether the entity is covered by paragraph 820-910(2)(a) (about working out the associate entity debt of another entity). Conditions for making the choice (5) For the income year that is or includes the first period for which the entity would be treated in accordance with the choice, the entity must satisfy: (a) subsection 820-435(1); or (b) subsections 820-435(2) and (3). Also, the entity must not have made a previous choice under this section that has ceased to have effect. Conditions are retested every 3 years (6) The choice ceases to have effect, or is taken to have ceased to have effect, as appropriate, at the end of an income year covered by subsection (7) of this section, unless the entity: (a) satisfies subsection 820-435(1) for that income year; or (b) satisfies subsections 820-435(2) and (3) for that income year. (7) This subsection covers every third income year after the one referred to in subsection (5). 820-435 Conditions (1) An entity satisfies this subsection for an income year if the average value, for that income year, of the entity's *on-lent amount is at least 80% of the average value, for that income year, of all the entity's assets. (2) An entity satisfies this subsection for an income year if the first period that is all or part of that income year, and for which the entity would be treated in accordance with a choice under section 820-430, consists of one or more periods, each of which is either or both of these: (a) a period throughout which the entity is a *financial entity because of paragraph (d) of the definition of financial entity in subsection 995-1(1) (which covers licensed (or exempt) dealers in derivatives); (b) a period throughout which: (i) the entity is the *head company of a *consolidated group or *MEC group; and (ii) at least one *member of the group is a financial entity because of that paragraph. (3) An entity satisfies this subsection for an income year if it satisfies subsection (2) and the amount worked out using this formula is greater than or equal to 0.8: [pic] where: on-lent amount means the average value, for that income year, of the entity's *on-lent amount. total assets means the average value, for that income year, of all the entity's assets. UG on derivatives means the average value, for that income year, of the entity's assets consisting of unrealised gains on trading derivatives within the meaning of the Corporations Act 2001. UL on derivatives means the lesser of: (a) the average value, for that income year, of the entity's liabilities consisting of unrealised losses on trading derivatives within the meaning of the Corporations Act 2001; and (b) the average value, for that income year, of the entity's assets consisting of unrealised gains on trading derivatives within the meaning of that Act. On-lent amount increased for financial entity whose assets include precious metals (4) In working out whether an entity satisfies subsection (1) or (3) for an income year, the average value, for that income year, of the entity's *on-lent amount is increased by the average value, for that income year, of the entity's assets that consist of *precious metals, but only if the entity satisfies subsection (5) for that income year. (5) An entity satisfies this subsection for an income year if the first period that is all or part of that income year, and for which the entity would be treated in accordance with a choice under section 820-430, consists of one or more periods, each of which is either or both of these: (a) a period throughout which the entity is a *financial entity; (b) a period throughout which: (i) the entity is the *head company of a *consolidated group or *MEC group; and (ii) at least one *member of the group is a financial entity. 820-440 Revocation of choice (1) A choice under section 820-430 can be revoked only with the written approval of the Commissioner. The Commissioner may approve a revocation only if satisfied that the entity's circumstances have changed significantly since the choice was made. (2) If revoked, the choice does not have effect for a period that starts on or after the day on which the Commissioner's approval is given, unless the revocation is expressed to take effect on an earlier day. In that case, it does not have effect for a period that starts on or after the earlier day. 820-445 How this Subdivision interacts with Subdivision 820-FA A choice under section 820-430 does not have effect for so much of a period as happens while the entity is a *subsidiary member of a *consolidated group or *MEC group. Note: If the head company of the group makes a choice under that section, that choice will have effect instead. Subdivision 820-FA-How the thin capitalisation rules apply to consolidated groups and MEC groups Guide to Subdivision 820-FA 820-579 What this Subdivision is about This Subdivision tells you: . how to classify the head company of a consolidated group or MEC group (in terms of which Subdivision of this Division to apply to the head company); and . how to apply this Division to the head company (including how the application is modified). Table of sections Operative provisions 820-581 How this Division applies to head company for income year in which group comes into existence or ceases to exist 820-583 Classification of head company 820-584 Exempt special purpose entities treated as not being member of group 820-585 Exemption for consolidated group headed by foreign- controlled Australian ADI or its holding company 820-587 Additional application of Subdivision 820-D to MEC group that includes foreign-controlled Australian ADI 820-588 Choice to treat specialist credit card institutions as being financial entities and not ADIs 820-589 How Subdivision 820-D applies to a MEC group Operative provisions 820-581 How this Division applies to head company for income year in which group comes into existence or ceases to exist If a *consolidated group or *MEC group: (a) comes into existence at a time during an income year that is not the start of the income year; or (b) ceases to exist at a time during an income year that is not the end of the income year; then, for each of the following periods during that income year: (c) a period throughout which a company is the *head company of that group; or (d) a period throughout which that company is the head company of a different consolidated group or MEC group; or (e) a period throughout which that company is a *member of no consolidated group or MEC group; this Division (except this section) is to have either: (f) a single application in relation to the whole of the period; or (g) 2 or more applications, each in relation to a part of that period. Example: Austco Ltd is not a member of a consolidated group for the first 6 months of an income year, but then becomes the head company of a consolidated group which continues in existence for the rest of the income year. For those first 6 months Austco is an outward investor (general) under section 820-85. For the rest of the income year Austco is an outward investor (general) under subsection 820- 583(2). This section ensures that section 820-120 (about part year periods) applies to Austco instead of section 820-85, so that Subdivision 820-B has 2 separate applications to Austco: one for the first 6 months and the other for the rest of the income year. Under the second application, account is taken of the position of the subsidiary members that are taken to be part of Austco as head company of the consolidated group. 820-583 Classification of head company Outward investing entity (non-ADI) (1) The *head company of a *consolidated group or of a *MEC group is an outward investing entity (non-ADI) for a period that is all or part of an income year if, and only if, it is: (a) an *outward investor (general) for that period (because of subsection (2)); or (b) an *outward investor (financial) for that period (because of subsection (3)). Outward investor (general) (2) The *head company of a *consolidated group or of a *MEC group is an outward investor (general) for a period that is all or part of an income year if: (a) for that period, the head company satisfies the condition in the second column of item 1 or 3 of the table in subsection 820- 85(2); and (b) no *member of the group is a *financial entity or *ADI at any time during that period. Outward investor (financial) (3) The *head company of a *consolidated group or of a *MEC group is an outward investor (financial) for a period that is all or part of an income year if: (a) for that period, the head company satisfies the condition in the second column of item 1 or 3 of the table in subsection 820- 85(2); and (b) throughout that period, there is at least one *member of the group that is a *financial entity; and (c) no *member of the group is an *ADI at any time during that period. Inward investing entity (non-ADI) (4) The *head company of a *consolidated group or of a *MEC group is an inward investing entity (non-ADI) for a period that is all or part of an income year if, and only if, it is: (a) an *inward investment vehicle (general) for that period (because of subsection (5)); or (b) an *inward investment vehicle (financial) for that period (because of subsection (6)). Inward investment vehicle (general) (5) The *head company of a *consolidated group or of a *MEC group is an inward investment vehicle (general) for a period that is all or part of an income year if: (a) throughout that period, the head company is a *foreign controlled Australian entity; and (b) no member of the group is a *financial entity or *ADI at any time during that period; unless the head company is an *outward investing entity (non-ADI) for all or part of that period. Inward investment vehicle (financial) (6) The *head company of a *consolidated group or of a *MEC group is an inward investment vehicle (financial) for a period that is all or part of an income year if: (a) throughout that period, the head company is a *foreign controlled Australian entity; and (b) throughout that period, there is at least one *member of the group that is a *financial entity; and (c) no member of the group is an *ADI at any time during that period; unless the head company is an *outward investing entity (non-ADI) for all or part of that period. Outward investing entity (ADI) (7) The *head company of a *consolidated group or of a *MEC group is an outward investing entity (ADI) for a period that is all or part of an income year if, and only if: (a) apart from Part 3-90 (about consolidation of groups) and this Subdivision, at least one *member of the group would be an *outward investing entity (ADI) for that period; or (b) these conditions are met: (i) at least one member of the group would, apart from that Part and this Subdivision, be an *outward investing entity (non- ADI) for that period; and (ii) at least one member of the group is an *ADI throughout that period. 820-584 Exempt special purpose entities treated as not being member of group While an entity meets the conditions in subsection 820-39(3) (about insolvency-remote special purpose entities established to manage economic risk), the entity is treated for the purposes of this Division (except this section) as not being a *member of a *consolidated group or *MEC group of which it is a member. Note: This section has the effect that the circumstances of the entity are not taken into account in applying this Division to the head company of the group. The entity itself is exempt from this Division because of section 820-39. 820-585 Exemption for consolidated group headed by foreign-controlled Australian ADI or its holding company (1) This Division does not disallow any of a *debt deduction for an income year if: (a) the debt deduction is of the *head company of a *consolidated group and the head company satisfies subsection (2) for that income year; or (b) the debt deduction is an amount incurred by the head company of a consolidated group during a period that is part of that income year, and the head company satisfies subsection (2) for that period. (2) The *head company satisfies this subsection for a period that is all or part of an income year if, throughout that period: (a) the head company is both a *foreign controlled Australian company and an *ADI (and would also be an ADI apart from Part 3- 90 (about consolidation of groups)); or (b) the head company: (i) is a *foreign controlled Australian company; and (ii) beneficially owns all the *membership interests in a *member of the group that is both a *foreign controlled Australian entity and an *ADI throughout that period; and (iii) would, apart from Part 3-90 (about consolidation of groups), have no other assets and no *debt capital; unless at least one member of the group would, apart from that Part and this Subdivision, be an *outward investing entity (non-ADI) or *outward investing entity (ADI) for all or part of that period. (3) Subsection (1) does not apply if, at each time in the period mentioned in subsection (2), all the *ADIs that are *members of the group then are *specialist credit card institutions. 820-587 Additional application of Subdivision 820-D to MEC group that includes foreign-controlled Australian ADI Subdivision 820-D applies to the *head company of a *MEC group as if it were an *outward investing entity (ADI) for a period that is all or part of an income year if: (a) the head company is not an outward investing entity (ADI) for that period; and (b) throughout that period, at least one *member of the group is both a *foreign controlled Australian entity and an *ADI; and (c) throughout that period, there is at least one *eligible tier-1 company of the *top company for the group that: (i) is a member of the group; and (ii) is not an ADI; and (iii) has no *wholly-owned subsidiary that is an ADI. 820-588 Choice to treat specialist credit card institutions as being financial entities and not ADIs (1) If the conditions in subsection (2) are met in relation to a *consolidated group or *MEC group and a period that is all or part of an income year, this Division (except this section) has effect as if: (a) none of the *members of the group were an *ADI at any time in the period; and (b) each member of the group that is an ADI (ignoring paragraph (a)) at any time in the period were a financial entity at that time. Note 1: One result of this Division having effect in that way is that Subdivision 820-D (and related provisions, such as section 820-589) will not apply in relation to the head company, because: (a) the head company of the group will not be classified under section 820-583 as an outward investing entity (ADI); and (b) section 820-587 will not apply that Subdivision. Note 2: Another result of this Division having effect in that way is that Subdivision 820-B or 820-C may apply in relation to the head company, because it may be classified under section 820-583 as either: (a) an outward investing entity (non-ADI) and an outward investor (financial); or (b) an inward investing entity (non-ADI) and an inward investment vehicle (financial). (2) The conditions are that: (a) at all times in the period at least one *member of the *consolidated group or *MEC group is an *ADI; and (b) each ADI that is a member of the group at any time in the period is a *specialist credit card institution at that time; and (c) the *head company of the group for the period chooses, before lodging its *income tax return for the income year, that this Division should have effect in that way in relation to the group and every period for which the conditions in paragraphs (a) and (b) are met in the income year. (3) An *ADI is a specialist credit card institution at a time if, at that time, the ADI's authority under section 9 of the Banking Act 1959 to carry on banking business (as defined in that Act) authorises the ADI to carry on only banking business that: (a) is participation in a payment system (as defined in the Payment Systems (Regulation) Act 1998) that is a credit card scheme and is designated under section 11 of that Act; and (b) is either or both of the following: (i) credit card acquiring (as defined in regulations made for the purposes of the Banking Act 1959); (ii) credit card issuing (as defined in those regulations). (4) To avoid doubt, a choice for the purposes of paragraph (2)(c) cannot be revoked. 820-589 How Subdivision 820-D applies to a MEC group (1) This section has effect for the purposes of working out the *adjusted average equity capital of the *head company of a *MEC group for a period (the test period) that is all or part of an income year if Subdivision 820-D applies to the head company in relation to that period. Note: Section 820-587 extends the application of Subdivision 820- D. (2) The *head company's *ADI equity capital at a particular time during the test period is to be worked out: (a) taking into account an *equity interest or *debt interest in the head company only if it is held at that time by an entity that is not a member of the group; and (b) on the basis that an equity interest or debt interest in an *eligible tier-1 company (other than the head company) that is a member of the group at that time is treated as an equity interest or debt interest (as appropriate) in the head company, but only if it is held at that time by an entity that is not a member of the group; and (c) on the basis of the information that would be contained in a set of consolidated accounts: (i) prepared, in accordance with the *accounting standard on consolidated accounts, as at that time; and (ii) covering the members of the group as at that time. Subdivision 820-FB-Grouping branches of foreign banks and foreign financial entities with a consolidated group, MEC group or single Australian resident company Guide to Subdivision 820-FB 820-595 What this Subdivision is about If: (a) the head company of a consolidated group or MEC group; or (b) an Australian company that cannot consolidate; is a member of the same wholly-owned group as a foreign bank or foreign financial entity, the company can choose to treat as part of itself the Australian branches of the foreign bank or foreign financial entity, affecting how the rest of this Division applies. Table of sections Choice to group with branches of foreign banks and foreign financial entities 820-597 Choice by head company of consolidated group or MEC group 820-599 Choice by Australian resident company outside consolidatable group and MEC group Effect of choice 820-601 Application 820-603 General 820-605 Effect on establishment entity if certain debt deductions disallowed 820-607 Effect on test periods under this Division 820-609 Effect on classification of head company or single company 820-610 Choice not to be outward investing entity (ADI) or inward investing entity (ADI) 820-611 Values to be based on what would be in consolidated accounts for group 820-613 How Subdivision 820-D applies 820-615 How Subdivision 820-E applies Choice to group with branches of foreign banks and foreign financial entities 820-597 Choice by head company of consolidated group or MEC group (1) This section applies if there is a period (the grouping period) for which all these conditions are met: (a) the period was all or part of an income year of the *head company of a *consolidated group or *MEC group; (b) the consolidated group or MEC group existed throughout the period; (c) the head company and an entity (the establishment entity) covered by one of the following subparagraphs are both members of the same *wholly-owned group throughout the period: (i) a *foreign bank that carried on its banking *business in Australia through at least one *Australian permanent establishment at each time in the period; (ii) a *foreign entity that was a *financial entity and had at least one Australian permanent establishment at each time in the period; (d) there is not a longer period in the income year for which the conditions in paragraphs (a), (b) and (c) are met in relation to the head company and the establishment entity. Note: It does not matter whether the income year ended on the same day for the head company and the establishment entity. (2) The *head company may choose to have all of the *Australian permanent establishments of the establishment entity treated as part of the head company for the grouping period for the purposes of this Division. (3) If the conditions in subsection (1) are met in relation to the *head company and more than one other establishment entity, the head company may make a different choice in relation to each of the other establishment entities. 820-599 Choice by Australian resident company outside consolidatable group and MEC group (1) This section applies if there is a period (also the grouping period) for which all these conditions are met: (a) the period was all or part of an income year of a company (the single company); (b) throughout the period the single company: (i) was an *Australian entity; and (ii) was not a *prescribed dual resident; and (iii) was not a *member of a *consolidatable group; and (iv) was not a member of a *consolidated group; and (v) was not a member of a *MEC group; (c) the single company and an entity (the establishment entity) covered by one of the following subparagraphs are both members of the same *wholly-owned group throughout the period: (i) a *foreign bank that carried on its banking *business in Australia through at least one *Australian permanent establishment at each time in the period; (ii) a *foreign entity that was a *financial entity and had at least one Australian permanent establishment at each time in the period; (d) there is not a longer period in the income year for which the conditions in paragraphs (a), (b) and (c) are met in relation to the single company and the establishment entity. Note: It does not matter whether the income year ended on the same day for the single company and the establishment entity. (2) The single company may choose to have all of the *Australian permanent establishments of the establishment entity treated as part of the single company for the grouping period for the purposes of this Division. (3) If the conditions in subsection (1) are met in relation to the single company and more than one other establishment entity, the single company may make a different choice in relation to each of the other establishment entities. Effect of choice 820-601 Application Sections 820-603 to 820-615 apply if a choice is made under section 820-597 or 820-599. 820-603 General (1) The choice cannot be revoked in relation to the grouping period. It binds the *head company or the single company, as appropriate, and the establishment entity. (2) The rest of this section applies: (a) to each *Australian permanent establishment that: (i) was an Australian permanent establishment of the establishment entity; and (ii) if the establishment entity was a *foreign bank-was an Australian permanent establishment through which the entity carried on banking *business in Australia at any time in the grouping period; and (b) in relation to each time (the test time) that was in the grouping period and was when the Australian permanent establishment: (i) was an Australian permanent establishment of the establishment entity; and (ii) if the establishment entity was a foreign bank-was an Australian permanent establishment through which the entity carried on banking business in Australia. (3) In the case of a choice under section 820-597, this Division (except Subdivision 820-FA, this Subdivision and Subdivision 820-L) applies as if, at the test time, the *Australian permanent establishment: (a) had been part of the *head company; and (b) had not been part of the establishment entity; and (c) were a *subsidiary member of the *consolidated group or *MEC group. (4) In the case of a choice under section 820-599, this Division (except Subdivision 820-FA, this Subdivision and Subdivision 820-L) applies as if, at the test time: (a) the *Australian permanent establishment had been part of the single company and had not been part of the establishment entity; and (b) the single company were a *consolidated group of which the single company was the *head company and the Australian permanent establishment was a *subsidiary member. (5) In either case, without limiting subsection (3) or (4), this Division (except Subdivision 820-FA, this Subdivision and Subdivision 820-L) applies as if: (a) the *Australian permanent establishment were an entity at that time; and (b) each asset and liability of the establishment entity at the test time that is attributable to the Australian permanent establishment were an asset or liability of the Australian permanent establishment at that time; and (c) without limiting paragraph (b) of this subsection, each cost that: (i) is a *debt deduction of the establishment entity incurred at the test time; and (ii) is attributable to the Australian permanent establishment; were a cost incurred by the Australian permanent establishment at that time; For the effects of disallowing debt deductions, see section 820- 605. (6) However, the application of this Division because of this section is subject to the modifications set out in sections 820-607 to 820-615. (7) For the purposes of this Division (as applying because of this Subdivision), this Act (except this Division) applies as if the matters referred to in subsections (3), (4) and (5) of this section were the case. Note: For example, this means that a head company is treated for the purposes of this Division as if it had debt deductions based on the actual costs incurred by an Australian permanent establishment while it is treated as part of the head company because of this section. 820-605 Effect on establishment entity if certain debt deductions disallowed If: (a) apart from this Division, a *debt deduction would be a deduction of the establishment entity for an income year; and (b) this Division (as applying because of this Subdivision) disallows all or part of the deduction (treated as a deduction of the *head company or single company); this section disallows the deduction of the establishment entity, or that part of it, as appropriate. Note 1A: The disallowed amount also does not form part of the cost base of a CGT asset. See section 110-54. Note 1: This Division does not disallow a debt deduction that the establishment entity incurs during the grouping period and that consists of a cost that is: . attributable to an Australian permanent establishment covered by the choice under section 820-597 or 820-599; and . paid or owed to the head company or single company. The cost is not a debt deduction of the head company or single company for the purposes of this Division as applying because of this Subdivision. This is because subsection 820- 603(3) or (4) treats the Australian permanent establishment as being part of the head company or single company, so the cost is treated as being paid or owed by the head company or single company to itself. Because subsection 820-603(3) or (4) also treats the Australian permanent establishment as not being part of the establishment entity, the cost is not a debt deduction of the establishment entity, so it is not disallowed by this Division as applying to the establishment entity. Note 2: This Division also does not disallow a debt deduction that the head company or single company incurs during the grouping period and that consists of a cost that is: . paid or owed to the establishment entity; and . is attributable to an Australian permanent establishment covered by the choice under section 820- 597 or 820-599. The cost is not a debt deduction of the head company or single company for the purposes of this Division as applying because of this Subdivision. This is because subsection 820- 603(3) or (4) treats the Australian permanent establishment as being part of the head company or single company, so the cost is treated as being paid or owed by the head company or single company to itself. 820-607 Effect on test periods under this Division If, apart from this section, this Division (except this Subdivision) would have a single application to the *head company or single company, or to the establishment entity, in relation to a period (the test period) that: (a) is all or part of an income year of that entity; and (b) overlaps the grouping period; this Division (except this section) is to have separate applications to that entity as follows: (c) a single application in relation to the period of overlap; and (d) a single application in relation to the part (if any) of the test period that is before the period of overlap; and (e) a single application in relation to the part (if any) of the test period that is after the period of overlap. 820-609 Effect on classification of head company or single company (1) The *head company or single company is an outward investing entity (ADI) for a period (the trial period) that is all or part of the grouping period if: (a) apart from this Subdivision, the head company or single company would be an *outward investing entity (ADI) for the trial period; or (b) apart from this Subdivision, the head company or single company would be: (i) an *outward investing entity (non-ADI) and an *outward investor (financial) for the trial period; or (ii) an *outward investing entity (non-ADI) and an *outward investor (general) for the trial period; and at least one of the *Australian permanent establishments is a *permanent establishment through which a *foreign bank carries on banking *business in Australia. (2) The *head company is also an outward investing entity (ADI) for the trial period if, apart from this Subdivision: (a) section 820-585 would prevent the disallowance of a *debt deduction for the income year including the trial period; or (b) section 820-587 would apply Subdivision 820-D to the head company as if it were an *outward investing entity (ADI) for the trial period. (3) The single company is also an outward investing entity (ADI) for the trial period if it is both a *foreign controlled Australian company and an *ADI for that period. (4) The *head company or single company is an inward investing entity (ADI) for the trial period if: (a) apart from this Subdivision, it would be an *inward investment vehicle (general) or an *inward investment vehicle (financial), and not an *outward investor (general) or an *outward investor (financial), for the trial period; and (b) at least one of the *Australian permanent establishments is a *permanent establishment through which a *foreign bank carries on banking *business in Australia. (5) The *head company or single company is an outward investing entity (non-ADI) and an outward investor (financial) for the trial period if, apart from this Subdivision, it would be an *outward investing entity (non-ADI) and: (a) an *outward investor (financial); or (b) an *outward investor (general); for that period, and: (c) at least one of the *Australian permanent establishments is a *permanent establishment of a *foreign entity that is a *financial entity; and (d) none of the Australian permanent establishments is a permanent establishment through which a *foreign bank carries on banking *business in Australia. (6) The *head company or single company is an inward investing entity (non-ADI) and an inward investment vehicle (financial) for the trial period if, apart from this Subdivision, it would be an *inward investing entity (non-ADI) and: (a) an *inward investment vehicle (financial); or (b) an *inward investment vehicle (general); for that period and not an *outward investor (general) or an *outward investor (financial) for that period and: (c) at least one of the *Australian permanent establishments is a *permanent establishment of a *foreign entity that is a *financial entity; and (d) none of the Australian permanent establishments is a permanent establishment through which a *foreign bank carries on banking *business in Australia. (7) This section has effect despite any other provision of this Division, except Subdivision 820-EA and section 820-610. Note: If the head company or single company is an outward investor (financial) or inward investment vehicle (financial) under this section and satisfies subsection 820- 430(5), it may choose under Subdivision 820-EA to be treated as an outward investing entity (ADI). Section 820-603 affects whether the company satisfies that subsection, by treating as part of the company each relevant foreign financial entity's Australian permanent establishment. 820-610 Choice not to be outward investing entity (ADI) or inward investing entity (ADI) (1) This section applies if: (a) apart from this section, the *head company or single company would, under section 820-609, be an *outward investing entity (ADI) or an *inward investing entity (ADI) for the trial period; and (b) at all times in the trial period, each of the following entities that is an *ADI is a *specialist credit card institution: (i) the head company or single company; (ii) an establishment entity whose *Australian permanent establishments the head company or single company has chosen under section 820-597 or 820-599 to have treated as part of the company for the period. (2) The *head company or single company is an outward investing entity (non-ADI) and an outward investor (financial) for the trial period if: (a) apart from this section, the company would, under section 820- 609, be an *outward investing entity (ADI) for the trial period; and (b) the company chooses, before lodging its *income tax return for the income year including the trial period, to be an outward investing entity (non-ADI) and an outward investor (financial) for that period. (3) The *head company or single company is an inward investing entity (non-ADI) and an inward investment vehicle (financial) for the trial period if: (a) apart from this section, the company would, under section 820- 609, be an *inward investing entity (ADI) for the trial period; and (b) the company chooses, before lodging its *income tax return for the income year including the trial period, to be an inward investing entity (non-ADI) and an inward investment vehicle (financial) for that period. (4) This section has effect despite sections 820-85, 820-185 and 820-609. 820-611 Values to be based on what would be in consolidated accounts for group (1) For the purposes of this Division as applying because of this Subdivision, the value or amount of a particular matter as at a particular time during the grouping period is 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 that time; and (b) covering the *consolidated group, *MEC group or single company, as appropriate, and each *Australian permanent establishment that section 820-603 treats as part of the *head company or single company at that time. Note: This subsection does not depend on whether such a set of consolidated accounts was prepared, or had to be prepared, for other purposes. (2) To avoid doubt, subsection (1) also applies to working out the value or amount, as at a particular time, of a matter mentioned in any of sections 820-613 to 820-615. 820-613 How Subdivision 820-D applies (1) This section has effect for the purposes of applying Subdivision 820-D to the *head company or single company in relation to a period (the test period) that is all or part of the grouping period. Note: Subdivision 820-D applies to the head company or single company if it is classified as an outward investing entity (ADI) because of section 820-609, either alone or in conjunction with a choice made by the company under section 820-430. Adjusted average equity capital (2) The *adjusted average equity capital of the *head company or single company for the test period is increased by the average value, for the period, of the amount worked out under subsection (3). Note 1: In the case of a choice under section 820-599, paragraph 820-603(4)(b) treats the single company and the relevant Australian permanent establishments as a consolidated group. Note 2: To calculate an average value for the purposes of this Division, see Subdivision 820-G. (3) The amount worked out under this subsection as at a particular day is the total of the amounts worked out under the following paragraphs for each of the establishment entity's *Australian permanent establishments that section 820-603 treats as part of the *head company or single company on that day: (a) so much of the establishment entity's *ADI equity capital, at the end of the day, as: (i) is attributable to that Australian permanent establishment; and (ii) has not been allocated to the *OB activities of the entity; (b) the amounts that, as at the end of that day: (i) are made available by the establishment entity to the Australian permanent establishment as loans to it; and (ii) do not give rise to any *debt deductions of the entity for the income year or any other income year. Note: The amounts 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. See section 820-611. Risk-weighted assets (4) For each of the establishment entity's *Australian permanent establishments that is covered by the choice, the *risk-weighted assets of the *head company or single company include that part of the entity's risk-weighted assets that: (a) is attributable to that Australian permanent establishment; and (b) is not attributable to the entity's *OB activities. 820-615 How Subdivision 820-E applies (1) This section has effect for the purposes of applying Subdivision 820-E to the *head company or single company in relation to a period (the test period) that is all or part of the grouping period. Note: Subdivision 820-E applies to the head company or single company if it is classified as an inward investing entity (ADI) because of section 820-609. Average equity capital (2) The average equity capital of the *head company or single company for the test period is: (a) the average value, for that period, of all the *ADI equity capital of the company; plus (b) the average value, for that period, of the amount worked out under subsection 820-613(3). Note 1: In the case of a choice under section 820-599, paragraph 820-603(4)(b) treats the single company and the relevant Australian permanent establishments as a consolidated group. Note 2: To calculate an average value for the purposes of this Division, see Subdivision 820-G. Safe harbour capital amount (3) The safe harbour capital amount of the *head company or single company for the test period is worked out using the following method statement. Method statement Step 1. Work out the average value, for the test period, of the *head company's or single company's *risk-weighted assets. Step 2. Multiply the result of step 1 by 4%. The result of this step is the safe harbour capital amount. Risk-weighted assets (4) For each of the establishment entity's *Australian permanent establishments covered by the choice, the *risk-weighted assets of the *head company or single company include that part of the entity's risk-weighted assets that: (a) is attributable to that Australian permanent establishment; and (b) is not attributable to the entity's *OB activities. Subdivision 820-G-Calculating the average values Guide to Subdivision 820-G 820-625 What this Subdivision is about This Subdivision sets out the methods of calculating the average values for the purposes of this Division. It also includes special rules about values and valuation that are relevant to that calculation. Note: Section 820-25 of the Income Tax (Transitional Provisions) Act 1997 provides for a transitional rule that affects the operation of this Subdivision in relation to an income year that begins before 1 July 2002 and ends before 30 June 2003. Table of sections How to calculate the average values 820-630 Methods of calculating average values 820-635 The opening and closing balances method 820-640 The 3 measurement days method 820-645 The frequent measurement method Special rules about values and valuation 820-675 Amount to be expressed in Australian currency 820-680 Valuation of assets, liabilities and equity capital 820-682 Recognition of assets and liabilities-modifying application of accounting standards 820-683 Recognition of internally generated intangible items- modifying application of accounting standards 820-684 Valuation of intangible assets if no active market- modifying application of accounting standards 820-685 Valuation of debt capital 820-690 Commissioner's power How to calculate the average values 820-630 Methods of calculating average values Methods of calculation for entities that are not ADIs (1) An entity to which Subdivision 820-B or 820-C applies for a period that is all or a part of an income year must use one of the following methods to calculate the average value of a matter mentioned in that Subdivision for the purposes of that application: (a) the method set out in section 820-635 (the opening and closing balances method); (b) the method set out in section 820-640 (the 3 measurement days method); (c) the method set out in section 820-645 (the frequent measurement method). Note 1: This subsection therefore applies only to an outward investing entity (non-ADI) or an inward investing entity (non-ADI). Note 2: An entity cannot apply the 3 measurement days method if it is unable to meet the requirements in subsection 820-640(1). An entity's ability to apply that method may therefore be limited. (2) The entity must use the same method to calculate all such average values for that period for the purposes of that application. Commissioner's power (3) If the entity fails to comply with subsection (2), the Commissioner may, irrespective of the methods used by the entity, recalculate all the average values for the entity and that period by using the opening and closing balances method. Method of calculation for ADIs (4) An entity to which Subdivision 820-D or 820-E applies for a period that is all or a part of an income year must use the frequent measurement method to calculate the average value of a matter mentioned in that Subdivision for the purposes of that application. Note: This subsection therefore applies only to an outward investing entity (ADI) or an inward investing entity (ADI). 820-635 The opening and closing balances method An entity that uses the opening and closing balances method for a period must apply the following method statement to calculate the average value of a matter for that period. Method statement Step 1. Work out the value of the particular matter as at the first day of that period. Step 2. Work out the value of the particular matter as at the last day of that period. Step 3. Add the results of steps 1 and 2. Step 4. Divide the result of step 3 by 2. The result of this step is the average value. Example: ALWZ Corporation, a company that is an Australian entity, held assets valued at $95 million on the first day of an income year. It held assets valued at $105 million at the end of that year. Adding those amounts and dividing the result by 2 gives the average value of its assets for that year, which is $100 million. 820-640 The 3 measurement days method Application (1) An entity must not use the 3 measurement days method for a period that is a part of an income year unless the following days occur during that period: (a) the last day of the first half of the income year; (b) one or both of the following days: (i) the first day of that year; (ii) the last day of that year. Method statement (2) An entity that uses the 3 measurement days method for a period must apply the following method statement to calculate the average value of a matter for that period. Method statement Step 1. Work out the value of the particular matter as at the first measurement day (see subsection (3)). Step 2. Work out the value of the particular matter as at the second measurement day (see subsection (3)). Step 3. Work out the value of the particular matter as at the third measurement day (see subsection (3)). Step 4. Add the results of steps 1, 2 and 3. Step 5. Divide the result of step 4 by 3. The result of this step is the average value. Example: RJ Corporation held assets valued at $115 million on the first day of an income year. It held assets valued at $105 million on the last day of the first half of that year, and $80 million on the last day of that year. Adding these amounts and dividing the result by 3 gives the average value of its assets for that year, which is $100 million. Measurement days (3) The following are the first, second and third measurement days: (a) the first measurement day is the first day of the income year if it occurs during that period, otherwise it is the first day of that period; (b) the second measurement day is the last day of the first half of that year; (c) the third measurement day is the last day of that year if it occurs during that period, otherwise it is the last day of that period. 820-645 The frequent measurement method (1) An entity that uses the frequent measurement method for a period (the measurement period) must calculate the average value of a matter for that period by applying: (a) the method statement in subsection (2) (generally based on quarterly periods); or (b) the method statement in subsection (4) (generally based on regular intervals). This section does not prevent the entity from applying the method statement in subsection (2) for one matter and the method statement in subsection (4) for another matter in relation to that period. (2) This is the method statement for the purposes of paragraph (1)(a). Method statement Step 1. Work out the value of the particular matter as at each of the following measurement days: (a) the first day of the measurement period; (b) the last day of each quarterly period of that income year (see subsection (3)) that occurs during the measurement period (if any); (c) the last day of the measurement period if it is not a day covered by paragraph (b). Step 2. Add up those values. Step 3. Divide the result of step 2 by the number of measurement days. The result of this step is the average value. Example: KJW Finance Corporation, a company that is an Australian entity, held assets valued at $130 million on the first day of an income year. On the last day of each quarterly period for that year it held assets valued at $140 million, $120 million, $110 million and $100 million respectively. Adding these amounts and dividing the result by 5 gives the average value of its assets for that year, which is $120 million. Quarterly period (3) The quarterly periods of the income year are: (a) the period consisting of the first, second and third months of that year; and (b) each successive period of 3 months that occurs after that period during that year. (4) This is the method statement for the purposes of paragraph (1)(b): Method statement Step 1. Work out the value of the particular matter as at each of the following measurement days: (a) the first day of the measurement period; (b) the last day of each regular interval for the measurement period (see subsection (5)); (c) the last day of the measurement period if it is not a day mentioned in paragraph (b). Step 2. Add up those values. Step 3. Divide the result of step 2 by the number of measurement days. The result of this step is the average value. Example: TW Corporation, a company that is an Australian entity, adopts a weekly interval for the purposes of this subsection. The measurement period is a period of 12 weeks. On the first day of that period it had $70 million of debt capital. Its debt capital was $80 million on the last day of each of the first 7 weeks, and $95 million on the last day of the remaining 5 weeks. Adding these amounts and dividing the result by 13 (the number of measurement days) gives the average value of its debt capital for that period, which is $85 million. Regular intervals (5) The regular intervals for the measurement period are: (a) a period which consists of a fixed number of days or months (not less than one day and not more than 3 months) adopted by the entity and begins at the start of the first day of the measurement period; and (b) each successive period of the same duration that occurs during the measurement period. Note: Examples of a regular interval therefore include a daily, weekly, fortnightly, monthly or quarterly interval. (6) The entity must use the same regular intervals when calculating the average values of different matters under subsection (4) for that period. Special rules about values and valuation 820-675 Amount to be expressed in Australian currency (1) For the purposes of this Division, an amount (including a value used in a calculation under this Division) is to be expressed in Australian currency. (2) An entity must comply with the *accounting standards in converting an amount into Australian currency. (3) Subsection (2) has effect whether the *accounting standard would otherwise apply to the entity or not. 820-680 Valuation of assets, liabilities and equity capital (1) For the purposes of this Division, an entity must comply with the *accounting standards in determining what are its assets and liabilities and in calculating: (a) the value of its assets (including revaluing its assets for the purposes of that calculation); and (b) the value of its liabilities (including its *debt capital); and (c) the value of its *equity capital. Note: This requirement to comply with the accounting standards is modified in certain cases (see sections 820-682, 820-683 and 820-684). (1A) In particular, for the purposes of this Division, the entity has an asset or liability at a particular time if, and only if, according to the *accounting standards, the asset or liability can or must be recognised at that time. Note: This application of the accounting standards is modified in certain cases (see sections 820-682 and 820-683). Requirements for revaluation of assets (2) A revaluation of assets mentioned in paragraph (1)(a) must be made by a person: (a) who is an expert in valuing such assets; and (b) whose pecuniary or other interests could not reasonably be regarded as being capable of affecting the person's ability to give an unbiased opinion in relation to that revaluation. Note 1: The entity must also keep records in accordance with section 820-985 about the revaluation, unless the exception in subsection (2A) of this section applies. Note 2: This subsection also applies to some revaluations that are not allowed by the accounting standards (see subsection 820- 684(5)). Revaluation reflected in statutory financial statements for the same period (2A) A revaluation of an asset need not comply with subsection (2) if: (a) the revaluation is for the purpose of the entity calculating the value of its assets for the purposes of this Division as applying to the entity for a particular period; and (b) the entity is required by an Australian law to prepare financial statements for a period that is or includes all or part of that period; and (c) those financial statements reflect the revaluation. External validation of a revaluation made internally (2B) A revaluation of assets mentioned in paragraph (1)(a) may be made by a person (the internal expert) if: (a) apart from this subsection, paragraph (2)(b) would prevent the internal expert from making the revaluation, but only because, in making it, he or she would be: (i) performing duties as an employee of the entity; or (ii) providing services under an *arrangement with the entity that is substantially similar to a contract of employment; and (b) another person (the external expert): (i) is not prevented by subsection (2) from making the revaluation; and (ii) has reviewed the methodology for making it (including the validity of any assumptions to be made, and the accuracy and reliability of the data and other information to be used); and (iii) has agreed that that methodology is suitable for making it; and (c) the internal expert makes the revaluation in accordance with that methodology. Note: This subsection also applies to some revaluations that are not allowed by the accounting standards (see subsection 820- 684(5)). Revaluation of individual assets (2C) Subsection (1) does not prevent the entity from revaluing one or more assets in a class of assets (as distinct from revaluing all the assets in the class) if the value of no asset in that class has fallen since the entity last calculated the total value of all the assets in that class in accordance with the *accounting standards. When further revaluation of assets required (2D) If: (a) the entity revalues one or more assets (whether constituting a class of assets or not) for the purpose of calculating the value of its assets for the purposes of this Division as applying to the entity for a particular period (the first period); and (b) the revaluation is not required by the *accounting standards; and (c) if the revaluation had been required by the accounting standards, the entity could have relied on it in preparing financial statements that the entity is required by an Australian law to prepare for a period (the later period) that ends after the first period; the entity may also rely on the revaluation in calculating the value of its assets for the purposes of this Division as applying to the entity for a period that is or includes all or part of the later period. (2E) If subsection (2D) does not permit the entity to rely on the revaluation in calculating the value of its assets for the purposes of this Division as applying to the entity for a period that is later than the first period, the revaluation is disregarded in determining whether subsection (1) requires the entity to revalue the one or more assets in calculating the value of its assets for those purposes. Note: As a result, the entity may not be required to make a further revaluation of the one or more assets. However, if the entity does not, it must use the value of the one or more assets that is reflected in financial statements for the relevant period that comply with the accounting standards. Accounting standards need not otherwise apply to the entity (3) Subsection (1) has effect whether the *accounting standard would otherwise apply to the entity or not. 820-682 Recognition of assets and liabilities-modifying application of accounting standards Deferred tax assets and deferred tax liabilities (1) Despite subsections 820-680(1) and (1A), an entity must not recognise: (a) a deferred tax liability (within the meaning of the *accounting standards) as a liability for the purposes of this Division; or (b) a deferred tax asset (within the meaning of the accounting standards) as an asset for the purposes of this Division. Note: Subsections 820-680(1) and (1A) require compliance with accounting standards. Surpluses and deficits in defined benefit superannuation plans (2) Despite subsections 820-680(1) and (1A), an entity must not recognise an amount relating to a defined benefit plan (within the meaning of the *accounting standards) as: (a) a liability for the purposes of this Division; or (b) an asset for the purposes of this Division. Note: Subsections 820-680(1) and (1A) require compliance with accounting standards. Not applicable to ADIs (3) This section does not apply in relation to an entity for a period if, for the period, the entity is an *outward investing entity (ADI) or an *inward investing entity (ADI). Not applicable to records about Australian permanent establishments (4) This section does not apply for the purposes of section 820- 960. 820-683 Recognition of internally generated intangible items-modifying application of accounting standards Accounting standards prevent recognition of some items (1) Subsection (2) applies in relation to an item, other than internally generated goodwill (within the meaning of *accounting standard AASB 138), if: (a) the item cannot be recognised under that standard as an internally generated intangible asset (within the meaning of that standard) because that standard determines that the cost of the item cannot be distinguished from the cost of developing the entity's business as a whole; and (b) the item would otherwise meet criteria under that standard for recognition as such an asset. Note 1: As a general rule, an entity must comply with the accounting standards when recognising its assets for the purposes of this Division (see subsections 820-680(1) and (1A)). Note 2: This section does not apply to ADIs (see subsection (6)). Entity may choose to recognise the item as an intangible asset (2) Despite subsections 820-680(1) and (1A), the entity may choose to recognise the item as such an asset for a period for the purposes of this Division (other than section 820-960). Note: Section 820-960 is about records for Australian permanent establishments. (3) A choice under subsection (2): (a) must be in writing and may cover more than one item; and (b) must be made before the due day for lodging the entity's *income tax return for the income year that is, or that includes, the period; and (c) subject to subsection (4), has effect, for the entity and the item, for the period and each later period. (4) The entity may, in writing, revoke a choice under subsection (2). The revocation has effect: (a) for each period in the income year for which the entity is next required to lodge an *income tax return; and (b) for each later period. (5) When: (a) recognising an item as an asset under this section; and (b) calculating the value of the asset (including revaluing the asset); the entity must, to the maximum extent possible, comply with the *accounting standards as if the recognition were allowed by those standards. This subsection has effect subject to section 820-684. Note: Section 820-684 will allow the entity to revalue the asset even if accounting standard AASB 138 would prevent this because of the absence of an active market. Choice not available to ADIs (6) An entity cannot make a choice under subsection (2) for a period if, for the period, the entity is an *outward investing entity (ADI) or an *inward investing entity (ADI). 820-684 Valuation of intangible assets if no active market-modifying application of accounting standards Accounting standards prevent revaluation of some assets (1) Subsection (2) applies if complying with *accounting standard AASB 138 would prevent an entity from revaluing an intangible asset (within the meaning of that standard) because of the absence of an active market (within the meaning of that standard). Note 1: As a general rule, an entity must comply with the accounting standards when revaluing its assets for the purposes of this Division (see subsection 820-680(1)). Note 2: This section does not apply to ADIs (see subsection (7)). Entity may choose to revalue the asset (2) Despite subsection 820-680(1), the entity may choose to revalue the asset for a period for the purposes of this Division (other than section 820-960). Note: Section 820-960 is about records for Australian permanent establishments. (3) A choice under subsection (2): (a) must be in writing and may cover more than one asset; and (b) must be made before the due day for lodging the entity's *income tax return for the income year that is, or that includes, the period; and (c) subject to subsection (4), has effect, for the entity and the item, for the period and each later period. (4) The entity may, in writing, revoke a choice under subsection (2). The revocation has effect: (a) for each period in the income year for which the entity is next required to lodge an *income tax return; and (b) for each later period. Requirements for such revaluations (5) Subsections 820-680(2) and (2B) apply in relation to a revaluation under subsection (2) in a corresponding way to the way they apply in relation to a revaluation mentioned in paragraph 820- 680(1)(a). Note 1: Subsections 820-680(2) and (2B) set out requirements and other matters in relation to revaluations under subsection 820-680(1). Note 2: The entity must also keep records in accordance with section 820-985 about the revaluation. (6) When revaluing an asset under subsection (2), the entity must, to the maximum extent possible, comply with the *accounting standards as if the revaluation were allowed by those standards. Choice not available to ADIs (7) An entity cannot make a choice under subsection (2) for a period if, for the period, the entity is an *outward investing entity (ADI) or an *inward investing entity (ADI). 820-685 Valuation of debt capital For the purposes of this Division, the regulations may make additional provisions for the valuation of the *debt capital of an entity. 820-690 Commissioner's power If the Commissioner considers that, in relation to a calculation under this Division, an entity has: (a) overvalued its assets; or (b) undervalued its liabilities (including its *debt capital); the Commissioner may, having regard to the *accounting standards and this Subdivision, substitute a value that the Commissioner considers is appropriate. Subdivision 820-H-Control of entities Guide to Subdivision 820-H 820-740 What this Subdivision is about This Subdivision sets out rules about the following: . the meaning of an Australian controller of a foreign entity (for the purpose of determining whether or not an entity is an outward investing entity (non-ADI) or outward investing entity (ADI)); . the meaning of a foreign controlled Australian entity (for the purpose of determining whether or not an entity is an inward investing entity (non-ADI)); . the method of working out the extent to which one entity is controlled by another entity for those purposes. Table of sections Australian controller of a foreign entity 820-745 What is an Australian controlled foreign entity? 820-750 What is an Australian controller of a controlled foreign company? 820-755 What is an Australian controller of a controlled foreign trust? 820-760 What is an Australian controller of a controlled foreign corporate limited partnership? Foreign controlled Australian entity 820-780 What is a foreign controlled Australian entity? 820-785 What is a foreign controlled Australian company? 820-790 What is a foreign controlled Australian trust? 820-795 What is a foreign controlled Australian partnership? Thin capitalisation control interest 820-815 General rule about thin capitalisation control interest in a company, trust or partnership 820-820 Special rules about calculating TC control interest held by an entity 820-825 Special rules about calculating TC control interests held by a group of entities 820-830 Special rules about determining percentage of TC control interest 820-835 Commissioner's power TC direct control interest, TC indirect control interest and TC control tracing interest 820-855 TC direct control interest in a company 820-860 TC direct control interest in a trust 820-865 TC direct control interest in a partnership 820-870 TC indirect control interest in a company, trust or partnership 820-875 TC control tracing interest in a company, trust or partnership Australian controller of a foreign entity 820-745 What is an Australian controlled foreign entity? An Australian controlled foreign entity, in relation to a particular time, is an entity that is any of the following at that time: (a) a *controlled foreign company (except a *corporate limited partnership); (b) a *controlled foreign trust; (c) a *controlled foreign corporate limited partnership. 820-750 What is an Australian controller of a controlled foreign company? An entity is an Australian controller of a *controlled foreign company mentioned in paragraph 820-745(a) at a particular time if, and only if, at that time: (a) that entity is an *Australian entity holding a *TC control interest in the controlled foreign company that is 10% or more; or (b) all of the following subparagraphs apply: (i) the controlled foreign company is such a company because of paragraph 340(c) of the Income Tax Assessment Act 1936; (ii) not more than 5 Australian entities, including that entity, control that controlled foreign company (either alone or together with *associate entities and whether or not any associate entity is also an Australian entity); (iii) that entity holds a *TC control interest in the controlled foreign company that is at least 1%. Note: A corporate limited partnership that is a foreign entity may be a controlled foreign corporate limited partnership, see section 820-760. 820-755 What is an Australian controller of a controlled foreign trust? An entity is an Australian controller of a *controlled foreign trust at a particular time if, and only if, at that time, the entity is an *Australian entity holding a *TC control interest in the trust that is 10% or more. 820-760 What is an Australian controller of a controlled foreign corporate limited partnership? Australian controller of a controlled foreign corporate limited partnership (1) An entity is an Australian controller of a *controlled foreign corporate limited partnership at a particular time if, and only if, at least one of the following paragraphs applies to the entity at that time: (a) the entity is an *Australian entity that is a *general partner of the partnership; (b) the entity is an Australian entity holding a *TC control interest in the partnership that is 10% or more. Controlled foreign corporate limited partnership (2) A *corporate limited partnership is a controlled foreign corporate limited partnership at a particular time if, and only if, at that time: (a) it is not an *Australian entity; and (b) at least one of the following subparagraphs applies to it: (i) at least one *general partner of the partnership is an *Australian entity or an *Australian controlled foreign entity; (ii) not more than 5 Australian entities (each of which holds a *TC control interest in the partnership that is at least 1%) hold a total of TC control interests in the partnership that is 50% or more. Foreign controlled Australian entity 820-780 What is a foreign controlled Australian entity? A foreign controlled Australian entity, in relation to a particular time, is an entity that is any of the following at that time: (a) a *foreign controlled Australian company; (b) a *foreign controlled Australian trust; (c) a *foreign controlled Australian partnership. 820-785 What is a foreign controlled Australian company? (1) A company (except a *corporate limited partnership) is a foreign controlled Australian company (or an FCAC) at a particular time if, and only if, at that time, it is an *Australian entity to which at least one of the following paragraphs applies: (a) not more than 5 *foreign entities (each of which holds a *TC control interest in the company that is at least 1%) hold a total of TC control interests in the company that is 50% or more; (b) a foreign entity holds a TC control interest in the company that is 40% or more, and no other entity or entities (except an *associate entity of the foreign entity or entities including the foreign entity or its associate entities) control the company; (c) not more than 5 foreign entities control the company (whether or not with associate entities and whether or not any associate entity is a foreign entity). Note: A corporate limited partnership that is an Australian entity may be a foreign controlled Australian partnership, see section 820-795. Exception (2) Despite subsection (1), a company is not an FCAC at a particular time if, at that time: (a) the company would, apart from this subsection, be an FCAC only because of paragraph (1)(a) or (b); but (b) the total of the following interests would be less than 20% if paragraphs 820-875(2)(a) and (b) were disregarded: (i) the *TC direct control interest in the company held by the *foreign entity or entities mentioned in paragraph (1)(a) or (b); (ii) the *TC indirect control interest in the company held by the foreign entity or entities; (iii) the TC direct control interests in the company held by any *associate entities of the foreign entity or entities (other than any TC direct control interests that have been taken into account in calculating the interest mentioned in subparagraph (ii)); (iv) the TC indirect control interests in the company held by the entity's associate entities (other than any TC indirect control interests that have been taken into account in calculating the interest mentioned in subparagraph (ii)). Note: Paragraphs 820-875(2)(a) and (b) set out special rules under which an entity is taken to hold a TC control tracing interest in another entity that is equal to 100%, which could then be taken into account in calculating a TC indirect control interest. 820-790 What is a foreign controlled Australian trust? (1) A trust is a foreign controlled Australian trust (or an FCAT) at a particular time if, and only if, at that time, it is an *Australian trust to which at least one of the following paragraphs applies: (a) not more than 5 *foreign entities (each of which holds a *TC control interest in the trust that is at least 1%) hold a total of TC control interests in the trust that is 50% or more; (b) a foreign entity holds a TC control interest in the trust that is 40% or more, and no other entity or entities (except an *associate entity of the foreign entity or entities including the foreign entity or its associate entities) control the trust; (c) all of the following subparagraphs apply to the trust: (i) at least one of the objects or beneficiaries of the trust is a foreign entity; (ii) there has been at least one distribution of income or capital of the trust made to such an object or beneficiary (whether directly or indirectly) during the income year in which that particular time occurs, or during the preceding 2 income years; (iii) the total TC control interests in the trust that are held by all its beneficiaries that are *Australian entities do not exceed 50%; (d) a foreign entity is in a position to control the trust (see subsection (2)). (2) A *foreign entity is in a position to control a trust if, and only if: (a) the entity, or an *associate entity of the entity, whether alone or with other associate entities (the relevant entity), has the power to obtain the beneficial enjoyment of the trust's capital or income (whether or not by exercising its power of appointment or revocation, and whether with or without another entity's consent); or (b) the relevant entity is able to control the application of the trust's capital or income in any manner (whether directly or indirectly); or (c) the relevant entity is able to do a thing mentioned in paragraph (a) or (b) under a *scheme; or (d) a trustee of the trust is accustomed or is under an obligation (whether formally or informally), or might reasonably be expected, to act in accordance with the relevant entity's directions, instructions or wishes; or (e) the relevant entity is able to remove or appoint a trustee of the trust. Exception (3) Despite subsection (1), a trust is not an FCAT at a particular time if, at that time: (a) the trust would, apart from this subsection, be an FCAT only because of paragraph (1)(a) or (b); but (b) the total of the following interests would be less than 20% if paragraphs 820-875(2)(a) and (b) were disregarded: (i) the *TC direct control interest in the trust held by the *foreign entity or entities mentioned in paragraph (1)(a), (b) or (c); (ii) the *TC indirect control interest in the trust held by the foreign entity or entities; (iii) the TC direct control interests in the trust held by any *associate entities of the foreign entity or entities (other than any TC direct control interests that have been taken into account in calculating the interest mentioned in subparagraph (ii)); (iv) the TC indirect control interests in the trust held by the entity's associate entities (other than any TC indirect control interests that have been taken into account in calculating the interest mentioned in subparagraph (ii)). Note: Paragraphs 820-875(2)(a) and (b) set out special rules under which an entity is taken to hold a TC control tracing interest in another entity that is equal to 100%, which could then be taken into account in calculating a TC indirect control interest. 820-795 What is a foreign controlled Australian partnership? Corporate limited partnership (1) A *corporate limited partnership is a foreign controlled Australian partnership (or an FCAP) at a particular time if, and only if, at that time: (a) it is an *Australian entity; and (b) at least one of the following subparagraphs applies to it: (i) not more than 5 *foreign entities (each of which holds a *TC control interest in the partnership that is at least 1%) hold a total of TC control interests in the partnership that are 50% or more; (ii) at least one *general partner of the partnership is a foreign entity or a *foreign controlled Australian entity. Partnership that is not a corporate limited partnership (2) A partnership other than a *corporate limited partnership is a foreign controlled Australian partnership (or an FCAP) at a particular time if, and only if, at that time: (a) at least one of the partners is an *Australian entity; and (b) at least one of the following subparagraphs applies to it: (i) not more than 5 *foreign entities (each of which holds a *TC control interest in the partnership that is at least 1%) hold a total of TC control interests in the partnership that is 50% or more; (ii) a foreign entity holds a TC control interest in the partnership that is 40% or more, and no other entity or entities (except an *associate entity of the foreign entity or entities including the foreign entity or its a