07 Apr 15 Debt and equity tax rules
On 2 April 2015 the government released the accelerated report by the Board of Taxation into aspects of the tax integrity rules that distinguish debt finance from equity: Review of the debt and equity tax rules – the related scheme and equity override integrity provisions: A Report to the Government (December 2014).
The report identifies and recommends reforms that would address uncertainty around the operation of the related scheme provisions in s 974-15 and 974-70, and the equity override integrity provision in s 974-80 of the Income Tax Assessment Act 1997 (Cth).
This report was accelerated as a result of stakeholder feedback received on the operation of the related scheme and s 974-80 provisions during a broader post-implementation review of the debt and equity rules.
The Board recommends that uncertainty around the operation of the related scheme and s 974-80 provisions be addressed by replacing the existing rules with a new provision based on principles the Board has identified. In addition, commercially relevant examples set out in the report should be included in the law to cover the most common types of schemes that give rise to questions about debt and equity characterisation.
Other solutions to resolve the uncertainty around the operation of the related scheme and s 974-80 provisions that have been considered, but not recommended by the Board, are canvassed in the report.
The government will consult on exposure draft legislation to implement the Board of Taxation’s recommended approach in the coming months.
The new rules will operate with prospective effect, and taxpayers who self-assessed in accordance with the previous government’s announcement in 2011 of its intention to amend the rules will be protected.
The full text of the report is available here.