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Inbound interest-free loans: Part 1

Published on 01 Apr 21 by "TAXATION IN AUSTRALIA" JOURNAL ARTICLE

Interest-free loans are typically drafted as “debt interests” for the purposes of Div 974 of the Income Tax Assessment Act 1997 (Cth) but are not included in the borrower’s thin capitalisation calculations due to there being no interest expense. While interest-free loans are a common funding instrument and appear to be simple, many complexities in relation to their tax treatment can arise. The debt/equity characterisation is often more complex than anticipated due to the breadth of the related scheme provisions, as well as the reconstruction provisions in the transfer pricing rules. Further, the treatment of an interest-free loan for thin capitalisation has been thrown into doubt due to the ATO’s conclusion in TD 2019/12 that a wide variety of costs can be “debt deductions” —if any of these costs are attributable to an interest-free loan, the loan can be included in the borrower’s adjusted average debt.

Author profile

Ellen Thomas ATI
Ellen is a tax lawyer based in Sydney. She focuses on the tax aspects of M&A and finance transactions, as well as tax audits and dispute resolution. She advises on a range of domestic and international M&A transactions, corporate restructures, post-acquisition integrations, international tax planning, distressed debt transactions, infrastructure investments and financial arrangements. Ellen also has extensive experience in dealing with the Australian Taxation Office, including in relation to ruling applications, audits and dispute resolution. - Current at 14 March 2018
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