Taxation Determination TD 2011/12
Date of effect: 25 May 2011

What this ruling is about: This publication (excluding appendixes) is a public ruling for the purposes of the Taxation Administration Act 1953. A public ruling is an expression of the Commissioner's opinion about the way in which a relevant provision applies, or would apply, to entities generally or to a class of entities in relation to a particular scheme or a class of schemes. If you rely on this ruling, the Commissioner must apply the law to you in the way set out in the ruling (unless the Commissioner is satisfied that the ruling is incorrect and disadvantages you, in which case the law may be applied to you in a way that is more favourable for you - provided the Commissioner is not prevented from doing so by a time limit imposed by the law). You will be protected from having to pay any underpaid tax, penalty or interest in respect of the matters covered by this ruling if it turns out that it does not correctly state how the relevant provision applies to you. Ruling 1. Subsection 230-50(1) of the Income Tax Assessment Act 1997 (ITAA 1997) [1] applies if an equity interest satisfies both subsections 230-50(1) and 230-45(1). Date of effect 2. This Determination applies to years of income commencing both before and after its date of issue. However, this Determination will not apply to taxpayers to the extent that it conflicts with the terms of a settlement of a dispute agreed to before the date of issue of this Determination (see paragraphs 75 and 76 of Taxation Ruling TR 2006/10). Commissioner of Taxation 25 May 2011




Appendix: 3. For Division 230 to apply to a gain or loss, it is necessary to identify a financial arrangement. A financial arrangement is the unit of taxation for Division 230. Subsections 230-45(1), 230-50(1) and 230-50(2) provide tests which specify when you have a financial arrangement. 4. Section 230-45 is the general test. Pursuant to subsection 230-45(1), you have a financial arrangement if you have, under an arrangement identified pursuant to subsection 230-55(4), a cash settlable right to receive or obligation to provide a financial benefit, or a combination of such rights and/or obligations, unless, broadly, you have not insignificant other rights to receive or obligations to provide something which is not a financial benefit, or the other rights or obligations are not cash settlable. Subsection 230-45(2) specifies the circumstances in which a right to receive or obligation to provide a financial benefit that you have is cash settlable. 5. Section 230-50 provides two further tests for having a financial arrangement. Subsection 230-50(2), in a similar way to section 230-45, specifies criteria pursuant to which certain rights and/or obligations, under an arrangement identified by subsection 230-55(4), are a financial arrangement. 6. Subsection 230-50(1), on the other hand, provides that an equity interest, as defined, constitutes the financial arrangement. The term 'equity interest' is defined in Subdivision 974-C [2] for an equity interest in a company, and in section 820-930 [3] for an equity interest for a partnership or trust. 7. Certain arrangements may satisfy both subsections 230-45(1) and 230-50(1). In this event it is necessary to determine which subsection takes precedence as Division 230 has limited operation in relation to section 230-50 financial arrangements. 8. The operation of Division 230 is limited or modified for 'a financial arrangement under section 230-50' in the following provisions: [4] 9. In summary, a section 230-50 financial arrangement is not subject to the following methods for calculating gains and losses from a financial arrangement: That is to say, Division 230 applies to an equity interest only where it is: | Which subsection applies: 10. An equity interest that is cash settlable will satisfy subsection 230-50(1) and may also satisfy subsection 230-45(1). In these circumstances, subsection 230-50(1) applies in preference to subsection 230-45(1). 11. Division 230 has been designed to ensure that not all tax-treatment methods apply to equity financial arrangements. This purpose should be given effect to irrespective of whether the equity financial arrangement also satisfies the requirements of a cash settlable financial arrangement. 12. The structure of the Division is that a broader range of things are included within the provisions, and then there are things excluded from the set of things included, and so on. So, for example, equity interests in partnerships and trusts are included as financial arrangements under subsection 230-50(1), then, broadly, paragraph 230-460(3)(b) [6] excludes them, then subsection 230-460(4) is an exception to that exclusion in relation to financial arrangements the subject of a fair value or financial reports election which are therefore re-included, and then, of such re-included financial arrangements, sub-sections 230-225(1) and 230-415(1) exclude issued equity financial arrangements. That leaves held trust and partnership equity interest financial arrangements the subject of a fair value or financial reports election as being subject to Division 230. From this structure, an inference can be drawn that the limited application purpose for section 230-50 financial arrangements ought to take precedence over the purpose that Division 230 ought to apply to all cash settlable financial arrangements. The structure is such that the exclusions and modifications that apply to equity interests are impressed upon the initial general inclusion. [7] 13. The conclusion that section 230-50(1) applies in preference to subsection 230-45(1) (where both are satisfied) is consistent with the statement in section 230-5 that: 14. With respect to a convertible note, Example 2.17 of the Explanatory Memorandum to the Tax Laws Amendment (Taxation of Financial Arrangements) Bill 2008 explains that where the convertible note is a cash settlable financial arrangement and an equity financial arrangement the convertible note is only subject to the limited operation of Division 230: TD 2010/D3


Continuation of Example 2.2 - Convertible note (cash settlable financial arrangement ) | Hamish Co's convertible note is a cash settlable financial arrangement. This is because under this arrangement Hamish has the right to receive cash coupon payments, and the ability to redeem the note upon maturity by receiving a payment of money, and Hamish Co did not have the sole or dominant purpose when entering into the arrangement of receiving the shares on conversion instead (subsection 230-45(1) and paragraph 230-45(2)(g)). | If Hamish Co's convertible note is also an equity interest , it will satisfy the definition of an 'equity financial arrangement' (see subsection 230-50(1)), and therefore will only be subject to a limited operation of Division 230 (refer to discussion on the limited operation of Division 230 to 'equity financial arrangements').


Related rulings: TR 2008/3
Legislative references: ITAA 1997 ITAA 1997 Div 230 ITAA 1997 Subdiv 230-C ITAA 1997 Subdiv 230-F ITAA 1997 Subdiv 974-C ITAA 1997 230-5(2)(b) ITAA 1997 230-40(4)(e) ITAA 1997 230-45 ITAA 1997 230-45(1) ITAA 1997 230-45 (2)(g) ITAA 1997 230-50 ITAA 1997 230-50(1) ITAA 1997 230-50(2) ITAA 1997 230-55 ITAA 1997 230-225(1) ITAA 1997 230-270(1) ITAA 1997 230-300(7) ITAA 1997 230-330(1) ITAA 1997 230-410(1)(d) ITAA 1997 230-415(1) ITAA 1997 230-440(1)(a) ITAA 1997 230-460(3)(b) ITAA 1997 230-460(4) ITAA 1997 820-930 ITAA 1997 974-75(1) ITAA 1997 995-1(1) TAA 1953
Subject references: accruals arrangement balancing adjustment cash settlable convertible note currency exchange rate effect equity interest fair value election financial arrangement financial reports election foreign currency hedge foreign exchange retranslation election hedging financial arrangement election realisation scheme taxation of financial arrangements