+ Debt / Equity Rules

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 Debt/Equity Rules

The effect of s45B of the ITAA 1936 is that a loan repayment by a company can represent a redistribution of the profit on the sale of an asset and in such circumstances it is therefore assessable as dividends.

This is the upshot of the debt/equity rules introduced into taxation law in 2001 and the anti-avoidance measures introduced in 1998. There is a carve out of the debt/equity rules for "at-call loans" for companies with an annual turnover of less than $20m but this does not apply where there is a 'material change' to the agreement.

Take the common scenario where an informal loan is made to a company and there is no written loan agreement and no discussed terms as to repayment. That loan would be repayable at call. If the terms of that loan were subsequently formally changed so that the loan was only repayable if, say, its business was sold, then that change would be a 'material change'.

Moreover, in ATOID 2003-752, the tax office considers that a loan to a company on interest free terms and repayable only in the event of a sale of the company is in reality an equity interest and not a debt interest for the purpose of the debt/equity rules. Readers are also referred to PS LA 2008-10 for an intensive explanation by the Commissioner of his views on how s45B works.

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