Document ID: chunk:federal_register_of_legislation:C2025C00029:section:3:p10
Version: federal_register_of_legislation:C2025C00029
Segment Type: section
Provision Reference: s 3 (pt 10/22)
Character Range: 7751888–7754598

If you have an equity interest in a company that is not a share, Subdivision 974‑E tells you what will count as a non‑share distribution, a non‑share dividend and a non‑share capital return in relation to the interest.

Concepts used in the debt and equity tests
 (6) Subdivision 974‑F defines a number of concepts that are used in the debt and equity tests (financing arrangement, effectively non‑contingent obligation, benchmark rate of return and converting interest).

Operative provisions

974‑10  Object
 (1) An object of this Division is to establish a test for determining for particular tax purposes whether a *scheme, or the combined operation of a number of schemes:
 (a) gives rise to a *debt interest; or
 (b) gives rise to an *equity interest.
Note 1: The test is used, for example, for:
(a) identifying distributions that may be frankable and which may be subject to dividend withholding tax; and
(b) identifying returns that may be deductible to the company making the return; and
(c) resolving uncertainty as to the proper tax treatment for debt/equity hybrid interests (interests that have some debt qualities and some equity qualities); and
(d) identifying debt capital for the purposes of Division 820 (thin capitalisation rules).
Note 2: Subdivision 167‑A has special rules for working out rights to dividends and capital distributions in a company whose shares do not all carry the same rights to those matters. Those rules include disregarding debt interests.
 (2) Another object of this Division is that the test referred to in subsection (1) is to operate on the basis of the economic substance of the rights and obligations arising under the *scheme or schemes rather than merely on the basis of the legal form of the scheme or schemes.
Note 1: The basic indicator of the economic character of a debt interest is the non‑contingent nature of the returns. The basic indicator of the economic character of an equity interest, on the other hand, is the contingent nature of the returns (or convertibility into an interest of that nature).
Note 2: The test is intended to operate, for example, to:
(a) deny deductibility (but allow franking) for "interest" in relation to a scheme that has the legal form of a loan if the economic substance of the rights and obligations arising under the relevant scheme gives the interest characteristics that are the same as or similar to those of a dividend on an ordinary share (and thereby prevent deductible returns on equity); and
(b) allow a deduction (but not franking) for a "dividend" in relation to a scheme that has the legal form of an ordinary share if the economic substance of the rights and obligations arising under the relevant scheme