ATO ID 2003/331: Financing arrangement
Date of decision: 30 April 2003
Year of income: Year ended 30 June 2003
Business line: Finance and Investment Centre of Expertise

Issue
If subsection 974-70(2) of the Income Tax Assessment Act 1997 (ITAA 1997) does not apply, is a cross currency swap that is used solely to allow the conversion of the income streams received under an arrangement from foreign dollars to Australian dollars an equity interest?

Decision
No. If subsection 974-70(2) of the ITAA 1997 does not apply, a cross currency swap that is used solely to allow the conversion of the income streams received under an arrangement from foreign dollars to Australian dollars is not an equity interest.

Facts
An Australian resident Trust wishes to subscribe for convertible debentures issued by Y, an overseas division of X Corporation. X Corporation enters into a cross currency swap with the Trust under which the Trust pays to X Corporation the Australian dollar proceeds raised from the issue of its units in the initial exchange under the swap. X Corporation pays to the Trust the equivalent amount in the foreign currency of the country in which Y is resident. The Trust uses this foreign currency to subscribe for non-share equity interests issued by Y. The Trust pays to X Corporation any foreign currency amounts it receives as dividends on these convertible debentures. X Corporation pays to the Trust the equivalent Australian Dollar amount. The Trust uses these Australian dollar amounts to pay distributions on its units. On the facts of the case the interests are not treated as giving rise to an equity interest in a company under subsection 974-70(2) of the ITAA 1997.

Reasons for decision
Summary: While subsection 974-130(3) of the ITAA 1997 provides inter alia, that a derivative that is used solely for managing financial risk is generally not a scheme entered into or undertaken to raise finance, consideration must be had of all the relevant circumstances and features of the arrangement to determine whether, in substance, it is appropriately characterised as a financing arrangement or not (refer paragraph 2.7 of the Explanatory Memorandum relating to the New Business Tax System (Debt and Equity) Bill 2001 ). In this case after the initial exchanges the cross-currency swap merely allows conversion of the income streams received under the arrangement from foreign dollars to Australian dollars. A consideration of all the relevant circumstances and features of this arrangement lead to the conclusion that the cross currency swap is not a financing arrangement but rather, that it is a derivative that is used for managing financial risk.

Legislative references: Income Tax Assessment Act 1997 subsection 974-70(2) section 974-130
Other references: Explanatory Memorandum relating to the New Business Tax System (Debt and Equity) Bill 2001) - paragraph 2.7
Subject references: Debt equity borderline