On 10 October 2016 Treasury released the long-awaited exposure draft legislation intended to give effect to the recommendations of the Board of Taxation in its accelerated December 2014 report (Accelerated Report) in relation to the related schemes and equity override (section 974-80) provisions in the Division 974 debt/equity rules. Treasury also released a draft explanatory memorandum and legislative instrument containing examples of how the provisions are intended to apply. The exposure draft does not address the other recommendations made by the Board of Taxation in its March 2015 final report in relation to its review of the debt/equity rules.
Changes to the equity override rule were initially proposed in the 2011 Federal Budget but have not been enacted. The Accelerated Report was publically released by Treasury on 2 April 2015, with an announcement that the Government would consult on exposure draft legislation to implement the Board of Taxation’s recommended approach ‘in the coming months’. See our prior Riposte discussing Treasury’s announcement.
The exposure draft closely reflects the Accelerated Report, and proposes to replace the existing related scheme aggregation provisions and the existing section 974-80, with a single new aggregation rule which does away with the existing ‘related scheme’ threshold.
The new aggregation rule is proposed to treat two or more schemes as a single aggregated debt or equity scheme only where:
- their pricing, terms and conditions of one scheme are interdependent with, or affect the economic consequences of, the pricing, terms and conditions of one or more other schemes in a way that would change the debt or equity treatment of the schemes if viewed separately; and
- it would be concluded that the schemes were ‘designed to operate’ to produce their combined economic effect.
The ‘designed to operate’ threshold question resembles the current drafting in section 974-80, which has given rise to uncertainty for taxpayers in the past, but includes an inclusive list of specific facts to have regard to. Importantly, there are specific carve-outs to the aggregation rule, and the Commissioner will have the ability to make a determination that it would be unreasonable for aggregation to apply in specific circumstances.
In addition to the specific carve-outs, and consistent with the approach taken in the Accelerated Report, there are specific examples of the application of the law which are proposed to be declared by legislative instrument. Importantly, not only do the specific examples illustrate the application of the core provisions, they may also extend or narrow the operation of the core provisions.
The amendments are expected to apply prospectively to schemes entered into (i.e. instruments issued) on or after a date yet to be fixed within the period commencing on the date of Royal Assent and ending 6 months following the date of Royal Assent. It is unclear whether the existing provisions or the proposed amendments will apply to existing instruments which are amended after the changes take effect.
Transitional relief is proposed up until the commencement of these amendments for companies who reasonably relied on 2011 Federal Budget announcement in filing their income tax returns.
Submissions on the exposure draft materials will close on 21 November 2016.
This Riposte provides our initial comments on the recommendations. A Tax Brief discussing the proposed amendments (including the proposed examples) in more detail will follow in due course.