Private ruling: Cross-border refinancing
Date of advice: 12 March 2025
Published: 19 May 2025
Ruling period: 31 December 20XX to 31 December 20XX
Date scheme commenced: 31 December 20XX

Ruling: Q1: Do the Existing Interest-Free Loans satisfy the debt test in section 974-20 of the Income Tax Assessment Act 1997 (ITAA 1997)? | A1: Yes. | Q2: Do the Existing Interest-Bearing Loans satisfy the debt test in section 974-20 of the ITAA 1997? | A2: Yes. | Q3: Are the Existing Loans considered to be Taxable Australian Property (TAP) under section 855-15 of the ITAA 1997? | A3: No. | Q4: Are the Existing Loans considered to be traditional securities for the purposes of sections 26BB and 70B of the Income Tax Assessment Act 1936 (ITAA 1936)? | A4: Yes. | Q5: Do the Convertible Notes (CNs) satisfy the debt test in section 974-20 of the ITAA 1997? | A5: No. | Q6: Do the CNs satisfy the equity test in subsection 974-70(1) of the ITAA 1997? | A6: Yes. | Q7: Are the CNs financial arrangements under section 230-50 of the ITAA 1997? | A7: Yes. | Q8: Are the CNs and New Interest-Bearing Loans considered 'related schemes' that are required to be aggregated under section 974-155 of the ITAA 1997? | A8: No. | Q9: Are the CNs considered TAP under section 855-15 of the ITAA 1997? | A9: No. | Q10: Is the first element of the CGT cost base of the CNs equal to the amount payable under the PNs used by the Foreign Shareholder to satisfy the subscription amount of the CNs? | A10: Yes. | Q11: Are the CNs considered traditional securities for the purposes of sections 26BB and 70B of the ITAA 1936? | A11: No. | Q12: Did a balancing adjustment arise under Subdivision 230-G of the ITAA 1997 from the repayment of the Existing Interest-Free Loans? | A12: No. | Q13: Did a gain arise under section 26BB of the ITAA 1936 from the repayment of the Existing Interest-Free Loans? | A13: No. | Q14: If a capital gain or loss arose from the repayment of the Existing Interest-Free Loans, was it disregarded under section 855-10 of the ITAA 1997? | A14: Yes. | Q15: Do the New Interest-Bearing Loans satisfy the debt test in section 974-20 of the ITAA 1997? | A15: Yes. | Q16: Did a balancing adjustment arise under Subdivision 230-G of the ITAA 1997 from the repayment of the Existing Interest-Bearing Loans? | A16: Yes. | Q17: Was the accrued interest that became receivable upon repayment of the Existing Interest-Bearing Loans non-assessable non-exempt income under section 128D of the ITAA 1936? | A17: Yes. | Q18: To the extent the coupon distributions are unfranked, will they be subject to withholding tax at a rate of 30% in accordance with subsection 128B(1) of the ITAA 1936? | A18: Yes. | Q19: Will the coupon distributions received on the CNs be non-assessable non-exempt income under section 128D of the ITAA 1936? | A19: Yes. | Q20: Will a gain or loss arise under Subdivision 230-G of the ITAA 1997 in respect of the conversion of the CNs to ordinary shares? | A20: No. | Q21: Does CGT event C2 happen on conversion of the CNs to ordinary shares? | A21: Yes. | Q22: Will the capital gain or loss arising from CGT event C2 on conversion of the CNs to ordinary shares be disregarded under subsection 130-60(3) of the ITAA 1997? | A22: Yes. | Q23: Will the first element of the CGT cost base of the ordinary shares be equal to the cost base of the original CNs in accordance with subsection 130-60(1) of the ITAA 1997? | A23: Yes. | Q24: Will the repayment of the face value of the CNs in cash give rise to CGT event C2? | A24: Yes. | Q25: Will a capital gain or loss arising from CGT event C2 be disregarded under section 855-10 of the ITAA 1997? | A25: Yes. | Q26: Will a gain or loss arise under Subdivision 230-G of the ITAA 1997 in respect of the repayment of the CNs? | A26: No.

Relevant facts and circumstances: 1. Company A, Company B and Company C, along with other subsidiaries, are part of a Multiple Entry Consolidated (MEC) Group (A Group) in Australia. 2. Company D (Foreign Shareholder) is an entity resident in a foreign country. 3. Company A, Company B and Company C are wholly owned by the Foreign Shareholder. The Foreign Shareholder does not carry on business in Australia other than its interests in Company A, Company B and Company C. 4. A Group was funded by a mix of related party and third party bank debt. The Foreign Shareholder has provided a combination of interest-bearing and interest-free loans (collectively the Existing Loans) to A Group to fund Australian operations. Interest-Bearing Loans 5. The existing related party interest-bearing loans (Existing Interest-Bearing Loans), and third party loans, were primarily used to fund the acquisition and development of assets, and working capital. 6. The key terms of the Existing Interest-Bearing Loans were: a. The lender was the Foreign Shareholder and the borrower was a subsidiary of Company B or Company C. b. The interest rate applicable to the loans was XX% per annum. c. The termination date (the date on which the principal was required to be repaid) was the date nine years from the date of the loan agreement. Interest-Free Loans 7. The existing interest-free loans (Existing Interest-Free Loans) were used to either refinance a portion of the existing interest-bearing loans, or fund expenditure of the group, reflecting the worsening position of the group resulting in its reduced ability to make interest payments on the loans. 8. The key terms of the Existing Interest-Free Loans were: a. The lender was the Foreign Shareholder and the borrower was a subsidiary of Company B or Company C. b. The interest rate applicable to the loans was nil. c. The termination date (the date on which the principal was required to be repaid) was the date nine years from the date of the loan agreement. d. The outstanding principal on the loans is repayable on demand at the lender's request. Refinancing of the Existing Interest-Free Loans (Refinancing 1) 9. A Group refinanced its related party loans from the Foreign Shareholder to a more appropriate capital structure. This was influenced by factors including: a. The potential introduction of third party investors. b. The implementation of a new corporate tax regime in the foreign country. c. The recent amendments to the Australian thin cap legislation. 10. Company B and Company C issued Convertible Notes (CNs) to the Foreign Shareholder and used the proceeds to repay existing related party loans to the extent required to achieve an appropriate arm's length capital structure. 11. The steps to implement Refinancing 1 were as follows: a. Company B and Company C issued the CNs to the Foreign Shareholder. b. The Foreign Shareholder satisfied the subscription amount of the CNs by issuing non-interest-bearing on-demand Promissory Notes (PNs). c. The PNs were contributed by Company B and Company C to the relevant subsidiary entities by way of intercompany loans. d. The PNs were used by the relevant subsidiaries to repay the face value of the Existing Interest-Free Loans to the Foreign Shareholder. e. The PNs then automatically extinguished. Refinancing the Existing Interest-Bearing Loans (Refinancing 2) 12. For A Group it was determined that the arm's length debt amount for the group should not exceed A$XX. The total interest-bearing debt (related party and third party) at XX December 20XX was A$XX. 13. A Group refinanced the Existing Interest-Bearing Loans with new interest-bearing loans (New Interest-Bearing Loans), which have similar terms to the Existing Interest-Bearing Loans, and CNs, to achieve the appropriate capital structure. The interest rate on the New Interest-Bearing Loans is based on the Australian Bank Bill Swap Reference Rate (administered by the Australian Securities Exchange) plus a margin. 14. The steps to implement Refinancing 2 were as follows: a. A subsidiary of Company B, Company E (Company E has the majority of external debt of the A Group), borrowed the New Interest-Bearing Loans from the Foreign Shareholder. b. Company B issued CNs to the Foreign Shareholder. c. The Foreign Shareholder satisfied the loan advance for the New Interest-Bearing Loans and subscription amount of the CNs by issuing further PNs. d. The PNs were contributed by Company B and Company E to the relevant subsidiary entities by way of intercompany loans. e. The PNs were used by the relevant subsidiaries to repay the face value of the Existing Interest-Bearing Loans and accrued but unpaid interest to the Foreign Shareholder. f. The PNs then automatically extinguished. 15. The interest rate on the New Interest-Bearing Loans was determined in accordance with Australian transfer pricing principles. Convertible Notes 16. The key terms of the deed for the CNs are as follows: a. The issuers are Company B and Company C. b. The holder is the Foreign Shareholder. c. The issue price is $XX per note. d. Company B and Company C used the proceeds to repay debt facilities of A Group (and for any other purpose agreed with the Foreign Shareholder). e. Each CN is perpetual and unsecured. f. Each CN ranks behind all secured and unsecured creditors of Company B or Company C on winding up but rank equally with all other CNs on issue. g. Each CN will be redeemed in priority to any return of capital or payment made on ordinary shares in the event of Company B or Company C being wound up. h. Each CN bears a discretionary coupon that accrues each calendar year at XX% per annum. The coupon is non-cumulative, and payment is at the election of Company B or Company C (i.e. there is no obligation on Company B or Company C to pay the coupon) except where a dividend is declared. In this instance the coupon must be paid prior to payment of the dividend. Where a coupon is paid it is considered likely that the payment would be unfranked. i. Company B and Company C may elect to convert some or all the CNs to ordinary shares based on a prescribed formula. The Foreign Shareholder has no right to convert the CNs. j. Company B and Company C may elect to redeem some or all the CNs where any of the following redemption events occurs (see below) or following the fifth anniversary of issue. The Foreign Shareholder has no right to redeem the CNs. k. A redemption event means the occurrence of any of the following: i. A regulatory event, being a change in tax or other regulatory arrangement that impacts how the CNs are treated. ii. A material capital raise through the divestment of investment assets. iii. A capital raising, being an issue of securities by the company to a further equity financing or funding arrangement. l. The CNs may be transferred by the Foreign Shareholder but only where the transfer does not give rise to any adverse outcomes for Company B, Company C and its shareholders, to a transferee that is not a competitor and has agreed to be bound by the terms of the CN deed. Other 17. A Group and the Foreign Shareholder are subject to the Taxation of Financial Arrangements (TOFA) provisions as contained in Division 230 of the ITAA 1997 and have not made any tax timing elections.

Relevant legislative provisions: Income Tax Assessment Act 1936 subsection 6(1) | Income Tax Assessment Act 1936 section 26BB | Income Tax Assessment Act 1936 subsection 26BB(1) | Income Tax Assessment Act 1936 section 70B | Income Tax Assessment Act 1936 subsection 70B(1) | Income Tax Assessment Act 1936 paragraph 128AAA(1)(c) | Income Tax Assessment Act 1936 section 128B | Income Tax Assessment Act 1936 subsection 128B(1) | Income Tax Assessment Act 1936 subsection 128B(2) | Income Tax Assessment Act 1936 paragraph 128B(3)(ga) | Income Tax Assessment Act 1936 subsection 128B(4) | Income Tax Assessment Act 1936 subsection 128B(5) | Income Tax Assessment Act 1936 section 128D | Income Tax Assessment Act 1936 subsection 159GP(1) | Income Tax Assessment Act 1936 subsection 159GP(3) | Income Tax Assessment Act 1997 section 103-15 | Income Tax Assessment Act 1997 subsection 104-25(1) | Income Tax Assessment Act 1997 paragraph 104-25(1)(f) | Income Tax Assessment Act 1997 subsection 104-165(3) | Income Tax Assessment Act 1997 section 110-25 | Income Tax Assessment Act 1997 subsection 110-25(2) | Income Tax Assessment Act 1997 subsection 112-20(1) | Income Tax Assessment Act 1997 subsection 112-20(2) | Income Tax Assessment Act 1997 section 118-20 | Income Tax Assessment Act 1997 subsection 130-60(1) | Income Tax Assessment Act 1997 subsection 130-60(1A) | Income Tax Assessment Act 1997 subsection 130-60(3) | Income Tax Assessment Act 1997 Division 230 | Income Tax Assessment Act 1997 Subdivision 230-B | Income Tax Assessment Act 1997 Subdivision 230-G | Income Tax Assessment Act 1997 section 230-20 | Income Tax Assessment Act 1997 section 230-40(2) | Income Tax Assessment Act 1997 paragraph 230-40(4)(e) | Income Tax Assessment Act 1997 section 230-50 | Income Tax Assessment Act 1997 subsection 230-50(1) | Income Tax Assessment Act 1997 paragraph 230-435(1)(b) | Income Tax Assessment Act 1997 subsection 230-440(1) | Income Tax Assessment Act 1997 subsection 230-445(1) | Income Tax Assessment Act 1997 section 230-510 | Income Tax Assessment Act 1997 subsection 230-510(1) | Income Tax Assessment Act 1997 section 855-10 | Income Tax Assessment Act 1997 subsection 855-10(1) | Income Tax Assessment Act 1997 section 855-15 | Income Tax Assessment Act 1997 section 855-20 | Income Tax Assessment Act 1997 section 855-25 | Income Tax Assessment Act 1997 subsection 855-25(1) | Income Tax Assessment Act 1997 subsection 960-130(1) | Income Tax Assessment Act 1997 subsection 960-130(3) | Income Tax Assessment Act 1997 section 960-135 | Income Tax Assessment Act 1997 Division 974 | Income Tax Assessment Act 1997 subsection 974-15(1) | 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 subparagraph 974-35(1)(a)(i) | Income Tax Assessment Act 1997 subparagraph 974-35(1)(a)(ii) | Income Tax Assessment Act 1997 subsection 974-35(3) | Income Tax Assessment Act 1997 subsection 974-60(1) | Income Tax Assessment Act 1997 subsection 974-70(1) | Income Tax Assessment Act 1997 section 974-75 | Income Tax Assessment Act 1997 subsection 974-75(1) | Income Tax Assessment Act 1997 section 974-130 | Income Tax Assessment Act 1997 subsection 974-135(1) | Income Tax Assessment Act 1997 subsection 974-135(3) | Income Tax Assessment Act 1997 section 974-155 | Income Tax Assessment Act 1997 subsection 974-155(1) | Income Tax Assessment Act 1997 subsection 974-155(2) | Income Tax Assessment Act 1997 subsection 974-155(3) | Income Tax Assessment Act 1997 subsection 995-1(1) | Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974 paragraph 7(a) | Taxation Administration Act 1953 section 12-210 of Subdivision 12-F of Schedule 1

Reasons for decision: Detailed Reasoning - Detailed reasoning: Subsection 974-15(1) of the ITAA 1997 notes that a scheme gives rise to a debt interest in an entity if, when it comes into existence, it satisfies the debt test in subsection 974-20(1) in relation to the entity. A scheme gives rise to a debt interest under subsection 974-20(1) of the ITAA 1997 if: (a) the scheme is a *financing arrangement for the entity; and (b) the entity, or a *connected entity of the entity, receives, or will receive, a *financial benefit or benefits under the scheme; and (c) the entity has, or the entity and a connected entity of the entity each has, an *effectively non-contingent obligation under the scheme to provide a financial benefit or benefits to one or more entities after the time when: (i) the financial benefit referred to in paragraph (b) is received if there is only one; or (ii) the first of the financial benefits referred to in paragraph (b) is received if there are more than one; and (d) it is substantially more likely than not that the value provided (worked out under subsection (2)) will be at least equal to the value received (worked out under subsection (3)); ... | Detailed Reasoning - Scheme: The term 'scheme' is defined broadly in subsection 995-1(1) of the ITAA 1997 to mean any arrangement, scheme, plan, proposal, action, course of action or course of conduct, whether unilateral or otherwise. The term 'arrangement' is also defined in subsection 995-1(1) of the ITAA 1997 to mean any arrangement, agreement, understanding, promise or undertaking, whether express or implied, and whether or not enforceable by legal proceedings. The Existing Interest-Free Loans satisfy the definition of a scheme. | Detailed Reasoning - Financing arrangement: Section 974-130 of the ITAA 1997 outlines that a scheme is a 'financing arrangement' for an entity if it is entered into or undertaken to raise finance for the entity (or a connected entity of the entity), or to fund another financing arrangement. The Existing Interest-Free Loans were provided by the Foreign Shareholder to the A Group to either refinance a portion of the Existing Interest-Bearing Loans or fund expenditure of the group. The Existing Interest-Free Loans are a financing arrangement. | Detailed Reasoning - Financial benefit: Subsection 974-60(1) of the ITAA 1997 defines a financial benefit to include anything of economic value. A Group received the loan amount from the Foreign Shareholder when the Existing Interest-Free Loans were advanced, satisfying this requirement. | Detailed Reasoning - An 'Effectively Non-Contingent Obligation' (ENCO) to provide a future financial benefit: Subsection 974-135(1) of the ITAA 1997 provides that there is an ENCO to take an action under a scheme if, having regard to the pricing, terms and conditions of the scheme, there is in substance or effect a non-contingent obligation to take that action. Subsection 974-135(3) of the ITAA 1997 provides that an obligation is non-contingent if it is not contingent on any event, condition or situation (including the economic performance of the entity having the obligation or connected entity) other than the ability or willingness of the relevant entity (or connected entity) to meet the obligation. At the time A Group received the financial benefit under the Existing Interest-Free Loans, it also had an ENCO to repay the Foreign Shareholder by the termination date. Accordingly, this requirement is satisfied. | Detailed Reasoning - Value of the financial benefit: The last element of the debt test requires that it is substantially more likely than not that the value of the financial benefit to be provided by the entity (or connected entity) will be at least equal to the value of the financial benefit received. The financial benefit to be provided is what the entity has an ENCO to provide to the investor in relation to the interest. This can include the return of the initial investment amount. The method of calculating the value of the financial benefit depends on the performance period of the arrangement. Under subsection 974-35(3) of the ITAA 1997 the performance period is the period within which, under the terms on which the interest is issued, the entity has to meet its ENCO in relation to the interest. Broadly, where the performance period is within ten years then the value will be calculated in nominal terms per subparagraph 974-35(1)(a)(i); and where the performance period is more than ten years then the value will be calculated in present value terms per subparagraph 974-35(1)(a)(ii). Under the terms of the Existing Interest-Free Loans, the termination date (the date on which the principal is required to be repaid by A Group to the Foreign Shareholder) is the date nine years from the date of the loan agreement. This means the value of the financial benefits provided by A Group are assessed in nominal terms. The amount A Group has an obligation to repay the Foreign Shareholder is equal to the amount received under the Existing Interest-Free Loans which means this requirement is also satisfied. As all of the requirements of section 974-20 are satisfied, the Existing Interest-Free Loans satisfy the debt test. | Detailed Reasoning - Question 2: The Existing Interest-Bearing Loans satisfy the debt test in section 974-20 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: In accordance with section 974-20 of the ITAA 1997 and based on the detailed reasoning in question 1: 1. The Existing Interest-Bearing Loans satisfy the definition of a scheme (paragraph 974-20(1)(a) of the ITAA 1997). 2. The Existing Interest-Bearing Loans were primarily used to fund the acquisition of assets and working capital and are therefore a financing arrangement (paragraph 974-20(1)(a) of the ITAA 1997). 3. A Group received the loan amount from the Foreign Shareholder when the Existing Interest-Bearing Loans were advanced, satisfying the financial benefit requirement (paragraph 974-20(1)(b) of the ITAA 1997). 4. At the time A Group received the financial benefit under the Existing Interest-Bearing Loans, it also had an ENCO to repay the Foreign Shareholder by the termination date. Accordingly, this requirement is satisfied (paragraph 974-20(1)(c) of the ITAA 1997). 5. Under the terms of the Existing Interest-Bearing Loans, the termination date (the date on which the principal is required to be repaid by A Group to the Foreign Shareholder) is the date nine years from the date of the loan agreement. This means the value of the financial benefits provided by A Group are assessed in nominal terms. A Group is also required to pay interest at a rate of XX% per annum. The amount A Group has an obligation to repay the Foreign Shareholder will therefore exceed the amount received under the Existing Interest-Bearing Loans which means this requirement is satisfied (paragraph 974-20(1)(d) of the ITAA 1997). As all of the requirements of section 974-20 are satisfied, the Existing Interest-Bearing Loans satisfy the debt test. | Detailed Reasoning - Question 3: The Existing Loans are not considered to be TAP under section 855-15 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: There are five categories of CGT assets that are TAP which are set out in the table in section 855-15 of the ITAA 1997 as follows: 1. Taxable Australian Real Property (TARP) as defined in section 855-20 of the ITAA 1997. 2. A CGT asset that is an Indirect Australian Real Property Interest (IARPI) as defined in section 855-25 of the ITAA 1997 and is not covered by item 5 of the table. 3. A CGT asset that has been used at any time in carrying on a business through a permanent establishment in Australia and is not covered by items 1, 2 or 5 of the table. 4. An option or right to acquire a CGT asset covered by items 1, 2 or 3 of the table. 5. A CGT asset that is covered by subsection 104-165(3) of the ITAA 1997 (choosing to disregard a gain or loss on ceasing to be an Australian resident). Item 1 does not apply as the Existing Loans will not be TARP. TARP is defined in section 855-20 of the ITAA 1997 as real property situated in Australia (including a lease of land situated in Australia) or a mining, quarrying or prospecting right if the minerals, petroleum or quarry materials are situated in Australia. Item 2 does not apply as the Existing Loans will not be an IARPI. An IARPI, as defined in subsection 855-25(1) of the ITAA 1997, requires a membership interest to be held. A membership interest is defined in section 960-135 and requires an entity to be a member which is defined in table item 1 of subsection 960-130(1) as being a member of the company or a stockholder in the company. Importantly, subsection 960-130(3) of the ITAA 1997 makes it clear that an entity is not a member of another entity just because the entity holds interests or rights in the other entity that are debt interests. The fact that the Foreign Shareholder also owns membership interests in A Group as a member does not impact this. Item 3 does not apply as the Foreign Shareholder does not carry on business in Australia. Item 4 does not apply as the Existing Loans do not give the Foreign Shareholder an option or right to acquire a CGT asset covered by items 1, 2 or 3 of the table. Item 5 does not apply as the Foreign Shareholder is not, and has not been, an Australian resident at any time. As the Existing Loans do not qualify as any of the five categories listed in section 855-15 of the ITAA 1997 they will not be TAP. | Detailed Reasoning - Question 4: The Existing Loans are considered to be traditional securities for the purposes of sections 26BB and 70B of the Income Tax Assessment Act 1936 (ITAA 1936). | Detailed Reasoning - Detailed reasoning: A traditional security is defined in subsection 26BB(1) of the ITAA 1936 as a security held by the taxpayer that: 1. Is or was acquired by the taxpayer after 10 May 1989. 2. Either does not have an eligible return, or has an eligible return where the precise amount of the eligible return is able to be ascertained at the time of issue of the security and the amount is not greater than 1.5% of the sum of the payments due under the security (excluding any periodic interest) multiplied by the term of the security. 3. Is not trading stock of the taxpayer. A security for these purposes has the same meaning as given in Division 16E of the ITAA 1936. Under subsection 159GP(1) of the ITAA 1936 (within Division 16E) the definition of security includes a secured or unsecured loan. Similarly, an eligible return also has its meaning given in Division 16E of the ITAA 1936. Under subsection 159GP(3) of the ITAA 1936 there shall be taken to be an eligible return in relation to a security if at the time when the security is issued it is reasonably likely, by reason that the security was issued at a discount, bears deferred interest or is capital indexed or for any other reason, for the sum of all payments under the security (other than periodic interest) to exceed the issue price of the security, and the amount of the eligible return is the amount of the excess. The Existing Loans are unsecured loans, were not offered at a discount, and do not contain any deferred income characteristics. The only returns due are the repayment of the face value at termination, and periodic interest payments in relation to the Existing Interest-Bearing Loans. As a result, the Existing Loans are considered to be traditional securities for section 26BB of the ITAA 1936. As expressions used in section 70B of the ITAA 1936 have the same meaning as in section 26BB in accordance with subsection 70B(1), the Existing Loans are also considered to be traditional securities for section 70B. | Detailed Reasoning - Question 5: The CNs do not satisfy the debt test in section 974-20 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Under the terms of the deed, the CNs are perpetual, and payment of the coupon is at the discretion of Company B or Company C (except where a dividend is declared). This means at the time A Group received the financial benefit under the CN, it does not have an ENCO to provide the Foreign Shareholder any financial benefits under paragraph 974-20(1)(c) of the ITAA 1997. The CNs therefore do not satisfy the debt test. | Detailed Reasoning - Question 6: The CNs satisfy the equity test in subsection 974-70(1) of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: A scheme gives rise to an equity interest under subsection 974-70(1) of the ITAA 1997 if the scheme satisfies the equity test in section 974-75 and the interest is not classified as a debt interest under section 974-20. A scheme satisfies the equity test if it gives rise to an interest of the kind listed in the table at subsection 974-75(1) of the ITAA 1997 which are: 1. An interest in the company as a member or stockholder of the company (table item 1 of subsection 974-75(1)). 2. An interest that carries a right to a variable or fixed return from the company if either the right itself, or the amount of the return, is in substance or effect contingent on aspects of the economic performance of the company (or connected entity). The return may be a return of an amount invested in the interest (table item 2 of subsection 974-75(1)). 3. An interest that carries a right to a variable or fixed return from the company if either the right itself, or the amount of the return, is at the discretion of the company (or connected entity). The return may be a return of an amount invested in the interest (table item 3 of subsection 974-75(1)). 4. An interest issued by the company that: (a) gives its holder (or a connected entity of the holder) a right to be issued with an equity interest in the company (or connected entity), or (b) is an interest that will, or may, convert into an equity interest in the company (or connected entity) (table item 4 of subsection 974-75(1)). Under the terms of the deed for the CNs, each CN bears a discretionary coupon with payment at the election of Company B or Company C. The exception is when either company, respectively, declares a dividend but this declaration itself is at the discretion of those companies. Company B and Company C may also elect to convert some or all of the CNs to ordinary shares according to the deed. The Foreign Shareholder which holds the CNs has no right to convert the CNs. Based on this the CNs meet the requirements of both item 3 and item 4(b) of the table in subsection 974-75(1) of the ITAA 1997. The CNs therefore satisfy the equity test. As the CNs do not also meet the debt test per question 5, they will be treated as equity interests. | Detailed Reasoning - Question 7: The CNs are financial arrangements under section 230-50 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Under subsection 230-50(1) of the ITAA 1997 an equity interest is taken to be a financial arrangement. As determined in question 6 the CNs satisfy the equity test in Division 974 and thus they will also be a financial arrangement subject to the TOFA provisions in Division 230. | Detailed Reasoning - Question 8: The CNs and New Interest-Bearing Loans are not considered 'related schemes' that are required to be aggregated under section 974-155 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Subsection 974-155(1) of the ITAA 1997 provides that two schemes are related to one another if they are related to one another in any way. Without limiting subsection 974-155(1) of the ITAA 1997, subsection 974-155(2) provides that two schemes are related if: (a) the schemes are based on stapled instruments; or (b) one of the schemes would, from a commercial point of view, be unlikely to be entered into unless the other scheme was entered into; or (c) one of the schemes depends for its effect on the operation of the other scheme; or (d) one scheme complements or supplements the other; or (e) there is another scheme to which both the schemes are related because of a previous application or applications of this subsection. However, subsection 974-155(3) of the ITAA 1997 provides that two schemes are not related to one another merely because one refers to the other, or they both have a common party. Having regard to the facts and circumstances, none of the criteria in subsection 974-155(2) of the ITAA 1997 are met. The CNs and New Interest-Bearing Loans will not give rise to related schemes for the purposes of section 974-155. | Detailed Reasoning - Question 9: The CNs are not considered TAP under section 855-15 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: As per question 3, there are five categories of CGT assets that are TAP as set out in the table in section 855-15 of the ITAA 1997. Of those, two are relevant to the CNs. Item 2 of the table in section 855-15 is for a CGT asset that is an IARPI (as defined in section 855-25, and not covered by item 5 of the table), and item 4 is for an option or right to acquire an IARPI. An IARPI, as defined in subsection 855-25(1) of the ITAA 1997, requires a membership interest to be held. A membership interest is defined in section 960-135 and requires an entity to be a member which is defined in table item 1 of subsection 960-130(1) as being a member of the company or a stockholder in the company. Notwithstanding that the CNs are classified as an equity interest under Division 974 of the ITAA 1997, they do not provide a membership interest to the Foreign Shareholder and are therefore not categorised as an IARPI. Under the terms of the CNs the Foreign Shareholder does not have an option or right to acquire an IARPI. The only option included under the terms is owned by Company B and Company C where they can elect to convert the CNs into ordinary shares. As the CNs do not meet the requirements to be an IARPI or provide the Foreign Shareholder with the option to acquire an IARPI, they will not be TAP. | Detailed Reasoning - Question 10: The first element of the CGT cost base of the CNs is equal to the amount payable under the PNs used by the Foreign Shareholder to satisfy the subscription amount of the CNs. | Detailed Reasoning - Detailed reasoning: Section 110-25 of the ITAA 1997 contains the general rules about the cost base of a CGT asset. Under subsection 110-25(2) the first element is the total of: (a) the money you paid, or are required to pay, in respect of *acquiring it; and (b) the *market value of any other property you gave, or are required to give, in respect of acquiring it (worked out as at the time of the acquisition). In accordance with section 103-15 of the ITAA 1997, being required to pay money or give property includes a requirement to pay money or give property at a later time. The issuing of a promissory note gives rise to an obligation on the issuer of the note to pay the agreed amount to the holder of the note. The proposed steps of Refinancing 1 and Refinancing 2 both involve the Foreign Shareholder satisfying the subscription amount of the CNs by issuing the PNs. The PNs will be contributed by Company B, Company C and Company E to the relevant subsidiaries by way of intercompany loans. The relevant subsidiaries will then use the PNs to repay the face value of Existing Loans (including any accrued but unpaid interest) to the Foreign Shareholder. The PNs will then automatically extinguish. Taxation Determination TD 2005/52 Income tax: capital gains: can money paid for the purposes of the first element of the cost base in subsection 110-25(2) of the Income Tax Assessment Act 1997 and the reduced cost base under section 110-55 of the Income Tax Assessment Act 1997 include the amount of a liability extinguished under the doctrine of set-off? (TD 2005/52) states that if an amount is owed in respect of the acquisition of a CGT asset, the set-off of all or part of that liability constitutes money paid in respect of the acquisition of the asset for the purposes of the first element of the cost base and the reduced cost base. According to TD 2005/52, a set-off occurs if there are presently due mutual liabilities of sums certain owing between the same parties which they agree to set-off in equal amounts against each other. A set-off will occur when the relevant subsidiaries endorse the PNs back to the Foreign Shareholder; there will be a set-off of equal amounts of liabilities for the relevant subsidiaries and the Foreign Shareholder. Therefore, the liabilities payable under the PNs which are set-off when the PNs are endorsed constitutes money paid by the Foreign Shareholder in respect of the acquisition of the CNs for the purposes of the first element of the cost base under subsection 110-25(2) of the ITAA 1997. The market value substitution rule can apply in certain circumstances. Subsection 112-20(1) of the ITAA 1997 provides that the first element of a cost base or reduced cost base of a CGT asset acquired from another entity is its market value if: (a) you did not incur expenditure to acquire it, except where your acquisition of the asset resulted from: (i) *CGT event D1 happening; or (ii) another entity doing something that did not constitute a CGT event happening; or (b) some or all of the expenditure you incurred to acquire it cannot be valued; or (c) you did not deal at *arm's length with the other entity in connection with the acquisition. In this instance, the Foreign Shareholder will incur expenditure to acquire the CNs per the analysis above, and the PNs can be valued. While there is nothing in the relevant facts and circumstances to suggest the parties are not dealing at arm's length, the market value substitution rule would apply where this is not the case. However, this is limited by subsection 112-20(2) of the ITAA 1997 which provides that the market value would only be substituted if the market value was less than the payment made to acquire the CNs. | Detailed Reasoning - Question 11: The CNs are not considered traditional securities for the purposes of sections 26BB and 70B of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: As per question 4 the term security is defined in subsection 26BB(1) of the ITAA 1936 by reference to subsection 159GP(1) of the ITAA 1936. Under subsection 159GP(1) security means: (a) stock, a bond, debenture, certificate of entitlement, bill of exchange, promissory note or other security; (b) a deposit with a bank or other financial institution; (c) a secured or unsecured loan; or (d) any other contract, whether or not in writing, under which a person is liable to pay an amount or amounts, whether or not the liability is secured. The CNs are not stock, a bond, debenture, certificate of entitlement, bill of exchange, or a promissory note. The term 'or other security' in paragraph (a) of the definition of security only encompasses instruments that evidence an obligation on the part of the issuer or drawer to pay an amount to the holder or acceptor, whether during the term of the instrument or at its maturity. The types of securities referred to in paragraph (a) of the definition of security will generally be recognised as debt instruments (Taxation Ruling TR 96/14 Income tax: traditional securities ). Paragraphs (b) and (c) of the definition of security do not apply because CNs are neither a deposit with a bank or other financial institution, nor a secured or unsecured loan. Only those contracts that have debt like obligations will usually fall under paragraph (d) of the definition of security (TR 96/14). The Terms of the CNs are such that Company B and Company C as issuers do not have an obligation to repay the face value, that is they are perpetual. The Foreign Shareholder has no right to require redemption, nor can it elect to have the CNs converted to ordinary shares. This remains at the discretion of Company B and Company C. As the CNs are not a security within the meaning of subsection 159GP(1) of the ITAA 1936, they cannot be a traditional security under subsection 26BB of the ITAA 1936. As expressions used in section 70B of the ITAA 1936 have the same meaning as in section 26BB in accordance with subsection 70B(1), the CNs are also not considered to be traditional securities for section 70B. | Detailed Reasoning - Question 12: A balancing adjustment did not arise under Subdivision 230-G of the ITAA 1997 from the repayment of the Existing Interest-Free Loans. | Detailed Reasoning - Detailed reasoning: A balancing adjustment under Subdivision 230-G of the ITAA 1997 applies when a taxpayer either transfers some or all of the rights and obligations under a financial arrangement to another person, or all of the taxpayer's rights or obligations under the financial arrangement otherwise cease. Specifically, paragraph 230-435(1)(b) of the ITAA 1997 provides that a balancing adjustment is made under Subdivision 230-G if the financial arrangement ceases. As the Existing Interest-Free Loans will be repaid in full, no balancing adjustment will arise under the method statement in subsection 230-445(1). In certain circumstances section 230-510 of the ITAA 1997 will substitute arm's length amounts in the balancing adjustment calculation where non-arm's length dealings have occurred. However, the Existing Interest-Free Loans will not require substitution as subsection 230-510(1) excludes debt interests or loans from this requirement. | Detailed Reasoning - Question 13: A gain did not arise under section 26BB of the ITAA 1936 from the repayment of the Existing Interest-Free Loans. | Detailed Reasoning - Detailed reasoning: Section 230-20 of the ITAA 1997 ensures that gains and losses to which TOFA applies are taken into account only once in working out taxable income. However, as per question 12, no balancing adjustment will arise on the repayment of the Existing Interest-Free Loans so section 230-20 is not enlivened and does not preclude section 26BB of the ITAA 1936 from applying. However, no gain or loss will arise on repayment under section 26BB as the Existing Interest-Free Loans will be repaid in full. | Detailed Reasoning - Question 14: Where a capital gain or loss arose from the repayment of the Existing Interest-Free Loans, it was disregarded under section 855-10 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Subsection 855-10 of the ITAA 1997 provides that a capital gain or loss from a CGT event is disregarded where you are a foreign resident just before the CGT event happens and the CGT event happens in relation to a CGT asset that is not TAP. As the Existing Interest-Free Loans (which form part of the Existing Loans) were not considered to be TAP, any capital gain or loss from their repayment was disregarded under section 855-10 of the ITAA 1997. | Detailed Reasoning - Question 15: The New Interest-Bearing Loans satisfy the debt test in section 974-20 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: In accordance with section 974-20 of the ITAA 1997 and based on the detailed reasoning per question 1: 1. The New Interest-Bearing Loans satisfy the definition of a scheme (paragraph 974-20(1)(a) of the ITAA 1997). 2. The New Interest-Bearing Loans were used to refinance the Existing Interest-Bearing Loans (which were used primarily to fund the acquisition of assets and working capital) and are therefore a financing arrangement (paragraph 974-20(1)(a) of the ITAA 1997). 3. A Group received the loan amount from the Foreign Shareholder when the New Interest-Bearing Loans were advanced, satisfying the financial benefit requirement (paragraph 974-20(1)(b) of the ITAA 1997). 4. At the time A Group received the financial benefit under the New Interest-Bearing Loans, it also has an ENCO to repay the Foreign Shareholder by the termination date. Accordingly, this requirement is satisfied (paragraph 974-20(1)(c) of the ITAA 1997). 5. Under the terms of the New Interest-Bearing Loans, the termination date (the date on which the principal is required to be repaid by A Group to the Foreign Shareholder) is the date nine years from the date of the loan agreement. This means the value of the financial benefits provided by A Group are assessed in nominal terms. A Group also is required to pay interest at a defined rate. The amount A Group has an obligation to repay the Foreign Shareholder will therefore exceed the amount received under the New Interest-Bearing Loans which means this requirement is satisfied (paragraph 974-20(1)(d) of the ITAA 1997). As all of the requirements of section 974-20 are satisfied, the New Interest-Bearing Loans satisfy the debt test. | Detailed Reasoning - Question 16: A balancing adjustment arose under Subdivision 230-G of the ITAA 1997 from the repayment of the Existing Interest-Bearing Loans. | Detailed Reasoning - Detailed reasoning: A balancing adjustment under Subdivision 230-G of the ITAA 1997 applies when a taxpayer either transfers some or all of the rights and obligations under a financial arrangement to another person, or all of the taxpayer's rights or obligations under the financial arrangement otherwise cease. Specifically, paragraph 230-435(1)(b) of the ITAA 1997 provides that a balancing adjustment is made under Subdivision 230-G if the financial arrangement ceases. Where accrued interest on the Existing Interest-Bearing Loans is only paid to the UAE Shareholder as part of the repayment of the loan in full, it should result in a balancing adjustment loss under the method statement in subsection 230-445(1). In accordance with subsection 230-40(2) of the ITAA 1997, to the extent that the accrued interest is taken into account by the balancing adjustment under Subdivision 230-G, it cannot be taken into account under the accruals or realisation method set out in Subdivision 230-B. | Detailed Reasoning - Question 17: The accrued interest that was received upon repayment of the Existing Interest-Bearing Loans was non-assessable non-exempt income under section 128D of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: Subsection 128B(2) of the ITAA 1936 provides that section 128B applies to interest income paid by a resident to a non-resident (subject to certain exceptions which have no application here). Under subsection 128B(5) the non-resident is liable to income tax (withholding tax) on this interest at the rate prescribed by Parliament for such income. Under section 128D of the ITAA 1936, income to which section 128B applies upon which withholding tax is payable is non-assessable non-exempt of a person. The accrued interest that was paid to the UAE Shareholder upon repayment of the Existing Interest-Bearing Loans is income to which section 128B and 128D of the ITAA 1936 applies. | Detailed Reasoning - Question 18: To the extent that coupon distributions on the CNs are unfranked, they will be subject to withholding tax at a rate of 30% in accordance with subsection 128B(1) of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: Subsection 128B(1) of the ITAA 1936 provides that section 128B applies to dividend income paid by a resident company and derived by a non-resident (subject to certain exceptions which have no application here but noting the exclusion for franked dividends provided by paragraph 128B(3)(ga)). Under 128B(4) the non-resident is liable to income tax (withholding tax) on this dividend at the rate prescribed by Parliament for such income. Paragraph 128AAA(1)(c) of the ITAA 1936 states that section 128B applies to a non-share dividend in the same way as it applies to a dividend. Therefore, to the extent the coupon distributions are unfranked, they will be subject to withholding tax at a rate of 30%. This is in accordance with paragraph 7(a) of the Income Tax (Dividends, Interest and Royalties Withholding Tax) Act 1974 , noting there is no reduction in the absence of a double tax agreement between Australia and the UAE. The withholding tax liability will be due when the dividend is paid, credited or distributed to the non-resident per the definition of 'paid' under subsection 6(1) of the ITAA 1936. GA Group has the obligation to withhold this amount under Section 12-210 of Subdivision 12-F of Schedule 1 of the Taxation Administration Act 1953 . | Detailed Reasoning - Question 19: The coupon distributions received on the CNs will be non-assessable non-exempt income under section 128D of the ITAA 1936. | Detailed Reasoning - Detailed reasoning: Under section 128D of the ITAA 1936, income to which section 128B applies upon which withholding tax is payable is non-assessable non-exempt of a person. The section also applies to income which would have withholding tax payable but for paragraph 128B(3)(ga) which excludes the franked part of a dividend from withholding tax. Therefore, as the coupon distributions received on the CNs will either be franked and exempt from withholding tax, or unfranked and subject to withholding tax, they will be non-assessable non-exempt income under section 128D of the ITAA 1936. | Detailed Reasoning - Question 20: A gain or loss will not arise under Subdivision 230-G of the ITAA 1997 in respect of the conversion of the CNs to ordinary shares. | Detailed Reasoning - Detailed reasoning: Under subsection 230-50(1) of the ITAA 1997 an equity interest is taken to be a financial arrangement. As the CNs satisfy the equity test in Division 974 they will also be a financial arrangement subject to the TOFA provisions in Division 230. However, the UAE Shareholder will not be required to recognise any gains or losses under TOFA in relation to the CNs as: 1. The UAE Shareholder has not elected into any of the elective Division 230 taxing methods. 2. The default accruals and realisation methods will not apply because the CNs are a financial arrangement under subsection 230-50(1) of the ITAA 1997 (refer paragraph 230-40(4)(e) of the ITAA 1997). 3. The default balancing adjustment method will not apply because the CNs are a financial arrangement under subsection 230-50(1) of the ITAA 1997 to which neither the fair value nor the financial reports method will apply (subsection 230-440(1) of the ITAA 1997). | Detailed Reasoning - Question 21: CGT event C2 happens on conversion of the CNs to ordinary shares. | Detailed Reasoning - Detailed reasoning: Paragraph 104-25(1)(f) of the ITAA 1997 provides that CGT event C2 happens if your ownership of a convertible interest ends because it was converted. A convertible interest in a company is defined in subsection 955-1(1) as being an interest of the kind referred to in item 4 of the table in subsection 974-75(1). Such an interest is one that will, or may, convert into an equity interest in the company which encompasses the CNs. Therefore, CGT event C2 captures the conversion of the CNs to ordinary shares. | Detailed Reasoning - Question 22: The capital gain or loss arising from CGT event C2 on conversion of the CNs to ordinary shares will be disregarded under subsection 130-60(3) of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Under subsection 130-60(3) of the ITAA 1997 a capital gain or loss made from converting a convertible interest is disregarded. Note 1 to this section confirms this would be an example of CGT event C2. Therefore, any capital gain or loss arising on the conversion of the CNs will be disregarded. | Detailed Reasoning - Question 23: The first element of the CGT cost base of the ordinary shares will be equal to the cost base of the original CNs in accordance with subsection 130-60(1) of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Subsection 130-60(1) of the ITAA 1997 sets out the modifications to the rules about cost base and reduced cost base that happens if you acquire shares by converting a convertible interest. The table distinguishes between convertible interests that are a traditional security and those that are not. The CNs are not considered to be a traditional security. Item 2 of the table at subsection 130-60(1) of the ITAA 1997 states that where you acquire a share by converting a convertible interest that is not a traditional security, the first element of the cost base and reduced cost base is the sum of: (a) the cost base of the convertible interest at the time of the conversion; and (b) any amount paid to convert the convertible interest, except to the extent that the amount is represented in the paragraph (a) amount; and (c) all the amounts to be added subsection (1A). Subsection 130-60(1A) of the ITAA 1997 provides that an amount is added to the cost base if a capital gain from the convertible interest has been reduced under section 118-20. This will not have application in this instance. As there is no conversion fee applicable to the CNs, the cost base of the ordinary shares will be the same as the cost base of the CNs. | Detailed Reasoning - Question 24: The repayment of the face value of the CNs in cash gives rise to CGT event C2. | Detailed Reasoning - Detailed reasoning: Subsection 104-25(1) of the ITAA 1997 provides that CGT event C2 happens if your ownership of an intangible CGT asset ends by the asset being inter alia redeemed, cancelled, released, discharged, or satisfied. The repayment of the face value of the CNs in cash will constitute satisfaction of the amount owed. As the repayment will be the face value this should be equal to the cost base of the CN so no capital gain or loss should arise. | Detailed Reasoning - Question 25: A capital gain or loss arising from CGT event C2 will be disregarded under section 855-10 of the ITAA 1997. | Detailed Reasoning - Detailed reasoning: Notwithstanding question 24, should a capital gain or loss arise it will be disregarded in accordance with subsection 855-10(1) of the ITAA 1997. This is because the subsection disregards any capital gains or losses made by a foreign resident just before the CGT event happens where the CGT asset is not TAP. As per the detailed reasoning in question 9, the CNs are not TAP. | Detailed Reasoning - Question 26: A gain or loss will not arise under Subdivision 230-G of the ITAA 1997 in respect of the repayment of the CNs. | Detailed Reasoning - Detailed reasoning: The UAE Shareholder will not be required to recognise any gains or losses under Subdivision 230-G of the ITAA 1997 in relation to the CNs as: 1. The UAE Shareholder has not elected into any of the elective Division 230 taxing methods. 2. The default accruals and realisation methods will not apply because the CNs are a financial arrangement under subsection 230-50(1) of the ITAA 1997 (refer paragraph 230-40(4)(e) of the ITAA 1997). 3. The default balancing adjustment method will not apply because the CNs are a financial arrangement under subsection 230-50(1) of the ITAA 1997 to which neither the fair value nor the financial reports method will apply (subsection 230-440(1) of the ITAA 1997).

The Existing Interest-Free Loans satisfy the debt test in section 974-20 of the ITAA 1997.