ATO ID 2002/794: Division 974 - non share equity interests
Date of decision: 24 June 2002
Year of income: Year ending 30 June 2002 to 30 June 2007
Business line: Private Groups and High Wealth Individuals

Issue
Is an investment in an unsecured note to be issued by a company to a director a non-share equity interest under Division 974 of the Income Tax Assessment Act 1997 (ITAA 1997), if the returns and the repayment of the investment are contingent upon the profitability of the company?

Decision
Yes. The unsecured note, to be issued by a company to a director, is a non-share equity interest under Division 974 of the ITAA 1997 as the returns and the repayment of the investment are contingent upon the economic performance of the company.

Facts
The taxpayer is a private investment company that is wholly owned by two corporate shareholders. The taxpayer intends to issue a finance raising unsecured note with no fixed maturity date, to its director. The payment of returns on the note, and repayment of the investment amount, will be contingent on the existence of company profits. The returns on the unsecured note are to be calculated as a percentage of the after-tax income of the taxpayer company.

Reasons for decision

Legislative references: Income Assessment Act 1997 Division 974 Subsection 974-5(4) Subsection 974-15(1) Subsection 974-20(1) Subsection 974-60(1) Subsection 974-70(1) Subsection 974-75(1) Subsection 974-130(1) Section 974-135 Subsection 974-160(1) Subsection 995-1(1)
Other references: Explanatory memorandum: New Business Tax System (Debt and Equity) Act 2001
Subject references: Debt equity borderline