The interaction between debt and equity rules and Transfer Pricing

The Australian Taxation Office (ATO) has said that the income tax rules and transfer pricing rules ‘can be read to operate harmoniously’.

In that regard, the ATO has released Tax Determination (TD) 2019/10 to clarify that the debt and equity rules in Division 974 of the Income Tax Assessment Act 1997 (Act) do not impact the transfer pricing rules in Subdivision 815-B of the Act.

Subdivision 815-B

Section 815-115 of the Act (substitution of arm’s length conditions between separate entities) applies to cross-border dealings in circumstances where an entity receives a transfer pricing benefit that differs from the benefit they would have received had the transaction been conducted between independent entities at arm’s length.

In those circumstances, arm’s length conditions are taken to operate, rather than the actual conditions, for the purposes of determining the entity’s taxable income, taxable loss, tax offset or withholding tax payable.

Division 974

Division 974 of the Act applies to determine whether a particular scheme or funding arrangement gives rise to a debt or equity interest. This is important in determining whether a dividend has been paid, whether withholding tax applies (and at what rate) and if the payments relating to the relevant interest are deductible as interest repayments or frankable as dividends.

Interaction

Section 815-110(1) of the Act provides that nothing in the Act limits the operation of Subdivision 815-B (including section 815-115).

Accordingly, Division 974 of the Act does not impact upon the operation of Subdivision 815-B and has no application when determining whether cross-border transactions are conducted at arm’s length. Instead, in determining whether or not there is a transfer pricing benefit from the funding arrangment, Division 974 applies to classify interests that arise under a scheme as either debt or equity by reference to arm’s length conditions, and not to the actual conditions prevailing at the time.

Effective life of depreciating assets: new Income Tax ruling

Taxation Ruling (TR) 2019/5 came into effect on 1 July 2019 and has replaced the former ruling on depreciating assets, ‘TR 2018/4’. The ruling explains the methodology used by the Commissioner of Taxation when calculating the effective life of depreciating assets and assists taxpayers when making their own estimates.

Most notable, compared to the previous ruling, TR 2019/5 provides new effective life determinations for assets used in the following industries and industry activities:

  • banking, building society and credit union operations;
  • creative and performing arts – performing dogs;
  • residential property operators;
  • retirement village and accommodation for the aged operation;
  • scientific testing and analysis services – mineral processing and metallurgical laboratory; and
  • wholesale trade.

Rewrite of South Australia’s Stamp Duty legislation: open for consultation

RevenueSA has announced that the Stamp Duties Act 1923 (SA) will be rewritten and is seeking feedback on how South Australia’s duty legislation could be improved.

The main purposes of the rewrite are to reduce complexity and compliance costs for taxpayers, abolish parts of the legislation that are counterproductive, and facilitate the efficient administration of the legislation. The rewrite is intended to be revenue-neutral and is not intended to amend existing government policy.

With the exception of Northern Territory, all other Australian States and Territories have introduced a new ‘Duties Act’ since 1997, giving South Australia the benefit of basing their rewrite on what has and has not been effective in other jurisdictions. South Australia will also have the benefit of being able to ‘tidy up’ their legislation by leaving out heads of duty that no longer apply.

Those looking to contribute feedback to the rewrite may do so through the following link. Consultations will close on 26 July 2019.

NSW Amendment Act receives Royal Assent

The State Revenue and Other Legislation Amendment Bill 2019 (NSW), which implements the state tax changes announced in the NSW 2019-20 Budget, received royal assent on 1 July 2019 and took effect from that date.

The new legislation has resulted in a raft of changes to duty, land tax and payroll tax in NSW. Our comments on these changes can be found at the following link.