ATO ID 2004/430: Debt/Equity: related scheme
Date of decision: 14 May 2004
Year of income: Year ended 30 June 2002 Year ended 20 June 2003 Year ended 20 June 2004 Year ended 20 June 2005 Year ended 20 June 2006 Year ended 20 June 2007
Business line: Finance and Investment Centre of Expertise

Issue
Will the issue of loan notes and shares that must be subscribed to together, but can subsequently be dealt with separately, be treated as related schemes under section 974-155 of the Income Tax Assessment Act 1997 (ITAA 1997)?

Decision
Yes. The loan notes and shares will be treated as related schemes because they satisfy the definition of a related scheme as contained in section 974-155 of the ITAA 1997.

Facts
A company intends raising funds to finance its investments via the issue of two different types of securities: ordinary shares and loan notes. The shares and loan notes will be issued under the one agreement. An investor subscribing to the company will be required to acquire both the shares and loan notes. The shares and loan notes may be dealt with independently of each other by the investors after they have been acquired from the company.

Reasons for decision
Summary: Section 974-155 of the ITAA 1997 sets out the circumstances in which two or more schemes are to be treated as related schemes for the purposes of Division 974 of the ITAA 1997. In the present case, the loan notes and the shares each constitute a scheme as defined in subsection 995-1(1) of the ITAA 1997. The loan notes and shares will satisfy the broad definition of a related scheme (subsection 974-155(1) of the ITAA 1997). Subsection 974-155(1) of the ITAA 1997 provides that 'subject to subsection (3), 2 schemes are related to one another if they are related to one another in any way'. This is qualified by subsection 974-155(3) of the ITAA 1997 which states that two schemes are not related to one another 'merely because: (a) one refers to the other; or (b) they have a common party'. In the arrangement in question, there is a relationship between the shares and the loan notes - a subscriber to the investment must purchase both the shares and the loan notes. This is a relationship that extends beyond one scheme merely referring to the other, or a relationship simply being due to the existence of a common party. Notwithstanding that the shares and loan notes give rise to a related scheme pursuant to the operation of subsection 974-155(1) of the ITAA 1997, whether the related schemes give rise to a debt interest or an equity interest as defined in Division 974 of the ITAA 1997 will be determined by the operation of the other relevant provisions within that Division.

Legislative references: Income Tax Assessment Act 1997 subsection 995-1(1) section 974-155
Related ATO interpretative decisions: ATO ID 2003/870
Subject references: Debt/equity borderline