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04 Jun 14 Deductibility of capital support payments - TD 2014/14

On 4 June 2014 the ATO issued taxation determination TD 2014/14, which asks the question: “Income tax: are the capital support payments described in this Determination deductible under section 8-1, section 40-880, subsection 230-15(2) or subsection 230-15(3) of the Income Tax Assessment Act 1997?”

The determination concerns the deductibility of a payment made by a parent entity under an arrangement which has all of the following features:

(a) The parent agrees to provide its subsidiary with one or more of the following:

(i) a lease, license or other right to use one or more assets (which is not a cash settlable right)

(ii) a legal or equitable interest (other than a cash settlable right) in one or more such assets, or

(iii) services.

(b) The subsidiary agrees to provide consideration to the parent for the things referred to in paragraph (a).

(c) The parent also agrees to make a payment to the subsidiary which, objectively:

(i) is made because all or a part of the subsidiary:

(A) has made a loss or losses

(B) is not, in the opinion of the parent or as agreed between the parent entity and one or more other parties (such as the subsidiary and/or a third party) sufficiently profitable (such as may be the case if the profit of the subsidiary is less than an agreed benchmark), or

(C) would or is likely to have made a loss or losses, or not have been sufficiently profitable in the sense used above, were it not for that payment, and

(ii) does not have the character of:

(A) a price for assets or services supplied by the subsidiary to the parent

(B) a genuine adjustment to the price of assets or services supplied by the parent to the subsidiary or by the subsidiary to the parent or

(C) a loan to the subsidiary or the repayment of such a loan.

(d) The parent’s obligation to provide the things referred to in paragraph (a) is not insignificant compared with the rights and obligations referred to in paragraphs (b) and (c).

In these circumstances, the determination says that such payments:

  • are capital in nature for the purposes of s 8-1(2)(a) of the Income Tax Assessment Act 1997
  • are not a loss from a financial arrangement and accordingly are not deductible under s 230-15(2) or 230-15(3)
  • are included in the cost base and reduced cost base of the parent’s investment in the subsidiary and are therefore not deductible under s 40-880.

The determination was previously issued in draft as TD 2014/D7.

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