Tax Counsel Tamera Lang ATIA, Tony Frost FTIA and Julian Pinson (Greenwoods & Freehills) represented The Tax Institute at a consultation meeting regarding the Budget announcement about s.974-80. Section 974-80 is an integrity provision in the debt/equity tax rules which can deem an interest from an arrangement that funds a return through connected entities to be an equity interest under certain circumstances (for a copy of the Budget announcement, refer to page 20 of Budget Paper No. 2).
Treasury called the meeting with the Professional Bodies as part of the first stage of their consultative process. At this stage, they are focussing on developing the policy on where it is appropriate for s.974-80 should apply, rather than legislative design (which will be considered later in the process). Treasury were very interested to hear about structures where s.974-80 is considered to be an issue (such as in some stapled structures). Treasury (and the Government) currently hold no firm views on how the amendments will proceed, and everything reported at this stage should not be seen as finalised Government policy.
Treasury are looking to the factors that may influence an “equity purpose” test. At this stage, they consider the following factors to be relevant:
- The flow of funds and return of funding between the company, the interposed entity and the ultimate investor;
- The role and functions of the interposed entity/ies; and
- The relationship between the interposed entity and the issuing entity, including the extent to which they have, in substance or effect, an ability to influence the payment of a return.
Treasury are also looking to for assistance to develop criteria for when it would be appropriate for the Commissioner to exercise his discretion to not apply s.974-80 (as per the Budget announcement). It was observed by the Professional Bodies that whilst a Commissioner’s discretion is welcomed, if the (amended) scope of s.974-80 is carefully articulated and appropriately targeted, there will hopefully be only a narrow role for such a discretion to operate.
Treasury advised the consultative group that they will not be examining the “connected entity” test, and are not proposing to legislatively address whether stapled entities are connected entities. The Professional Bodies expressed disappointment that this issue will not be addressed. It is the Professional Bodies’ view that the “connected entity” criterion is an essential element of s.974-80, and to not consider its role as part of this consultative process would be suboptimal.
At the meeting, the Professional Bodies stepped through a number of factual scenarios, including commonly encountered stapled structures, and discussed whether s.974-80 should operate from a policy perspective. It is hoped that a number of the examples put to Treasury could be used to form part of a future Explanatory Memorandum to the re-drafted s.974-80. As noted above, this is the first stage in the Treasury consultation, and we expect that more information will requested/provided in due course.
Finally, Treasury could not give any indication as to when the policy position will be settled such that they can move on to releasing exposure draft legislation.
If members are interested in being involved in this consultation or receiving updates on how it is progressing, please contact us at Tax Policy.