Review of debt and equity tax rules of financial instruments

The Board of Taxation has issued a Discussion Paper as part of a post-implementation review of the debt and equity rules.

Amongst other things the Board seeks stakeholder comment regarding the compliance and administration of Division 974 of the Income Tax Assessment Act 1997 since its enactment in 2001, in particular whether there should be a legislative provision for entities regulated by APRA that aligns tax characterisation with prudential characterisation, with a regulation-making power available to exclude particular items.

The debt and equity rules in Division 974 classify certain financing arrangements as debt or equity for specified tax purposes on the basis of the economic substance of the arrangement rather than merely on the basis of legal form.

The regulations classify certain Upper Tier 2 instruments issued by banks, Lower Tier 2 instruments issued by credit unions and building societies, term
subordinated debt instruments containing ‘solvency clauses’ and term subordinated notes issued by APRA-regulated entities.

The banks argue that it would be more efficient to make a broad regulation to ensure that the tax debt treatment of APRA-regulated banks is aligned with the APRA features for Tier 2 instruments.

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