Private ruling: Application of the debt equity rules
Date of advice: 22 December 2020
Published: February 2021
Ruling period: 1 July 20XX to 31 June 20XX

Ruling: Q1: Will the Notes give rise to a debt interest under subsection 974-15(1) of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes | Q2: Will the Notes give rise to an effectively non-contingent obligation as defined in section 974-135 of the ITAA 1997? | A2: Yes

Relevant facts and circumstances: Trust A is an Australian resident unit trust that is carrying on a money lending business. Trust A intends to issue Notes to unrelated investors and grant commercial short to mid-term loans to third party borrowers (Borrowers), with such loans (Loans) being secured by registered mortgage over real property. Notes will be secured by a first ranking security interest over: • a particular Loan • the security or guarantee granted by the Borrower for that Loan • all interest payments (including any pre-paid interest amounts) and principal repayments under the Loan paid to Trust A, and • any amounts recovered (after recovery costs reasonably incurred) in enforcing the securities granted to it with respect to the Loan. The Loan must be secured over real property by registered 1 st mortgage or registered 2 nd mortgage (in limited circumstances). The Notes bear fixed interest which accrues on a daily basis. There is an obligation to repay the principal outstanding on a Note on its maturity date. The Notes will have a maturity date that does not exceed 10 years. In the event of default by the Borrower, the maturity date of a Note is automatically extended (with interest continuing to accrue at a higher rate). There are limitations on the recourse of note holders.

Relevant legislative provisions: Income Tax Assessment Act 1997 Division 974 | Income Tax Assessment Act 1997 section 974-15 | Income Tax Assessment Act 1997 subsection 974-15(1) | Income Tax Assessment Act 1997 subsection 974-15(2) | Income Tax Assessment Act 1997 section 974-20 | Income Tax Assessment Act 1997 subsection 974-20(1) | Income Tax Assessment Act 1997 paragraph 974-20(1)(a) | Income Tax Assessment Act 1997 paragraph 974-20(1)(b) | Income Tax Assessment Act 1997 paragraph 974-20(1)(c) | Income Tax Assessment Act 1997 paragraph 974-20(1)(d) | Income Tax Assessment Act 1997 paragraph 974-20(1)(e) | Income Tax Assessment Act 1997 subparagraph 974-35(1)(a)(i) | Income Tax Assessment Act 1997 subsection 974-35(2) | Income Tax Assessment Act 1997 subsection 974-35(4) | Income Tax Assessment Act 1997 subsection 974-130(1) | Income Tax Assessment Act 1997 section 974-155 | Income Tax Assessment Act 1997 section 974-160 | Income Tax Assessment Act 1997 subsection 995-1(1)

Reasons for decision: Summary: Subsection 974-15(1) of the ITAA 1997 provides that a scheme gives rise to a debt interest in an entity if the scheme, when it comes into existence, satisfies the debt test in subsection 974-20(1) of the ITAA 1997 in relation to the entity. Having regard to the pricing, terms and conditions of the scheme, the Notes are considered to satisfy the requirements in paragraphs 974-20(1)(a) to (e) of the ITAA 1997. In particular, there is an effectively non-contingent obligation to provide financial benefits under the scheme and it is substantially more likely than not that the value of those financial benefits provided will equal or exceed the value of the financial benefits received. Therefore, the Notes will give rise to debt interests within the meaning of subsection 974-15(1) of the ITAA 1997. As discussed in Question 1, the obligation under Notes are effectively non-contingent obligation as defined in section 974-135 of the ITAA 1997.