16 December 2002

More Time to Apply Debt/Equity Rules

The Minister for Revenue and Assistant Treasurer, Senator Helen Coonan, today announced businesses would be given more time to get certain related-party loans in order to ensure there were no unintended consequences under new debt/equity rules.

The transitional period for certain related party at call loans under the debt/equity tax measures will be extended from 31 December 2002 to 30 June 2004.

The debt/equity rules commenced on 1 July 2001 and a transitional period was put in place to delay the time by which the debt/equity measures must be applied to related party at call loans issued after 1 July 2001.

The debt/equity rules determine whether a financing arrangement is treated as debt or equity for income tax purposes. This can have a major impact on the tax results of such arrangements because returns on a debt interest for tax purposes may be deductible and are non-frankable, while returns on an equity interest are non-deductible and may be frankable.

"The extension of the transitional period for related party at call loans will give businesses having difficulties with the application of the rules an extra 18 months in which to review these loans and assess whether any changes are required to ensure they continue to be treated as debt," Senator Coonan said.

The at call loans that qualify for the extended transitional period are loans to a related party that do not have a fixed term and repayable on demand by the related party. Typically, interest payments may fluctuate as determined by the parties from time to time.

Without this extension to the transitional period, an at call loan could have been treated as an equity interest after the original transitional period ended on 31 December 2002.

"The extension will help taxpayers by allowing them more time to ensure their at call loans are appropriately classified under the debt/equity criteria," Senator Coonan said.

"Small business representatives have indicated a lack of understanding and awareness of the possible change in tax treatment of these very common loans and raised concerns about increased compliance costs. In these circumstances it was considered appropriate to extend the transitional period for such loans.

"The extension of the transitional period also allows the operation of the measure to be reviewed in consultation with industry - particularly small business. As such, the extended transitional period will be welcome news for small business and their advisers" Senator Coonan said.

The date of 30 June 2004 coincides with a similar transitional period applying to financing arrangements entered into prior to 1 July 2001.

The Government plans to introduce the amendment in the 2003 Winter Parliamentary sittings.