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ATO Publishes Taxation Determination on Thin Capitalisation - Valuation of Debt Capital — Orbitax Tax News & Alerts

The Australian Taxation Office (ATO) has issued Taxation Determination (TD) 2020/2 Income tax: thin capitalisation - valuation of debt capital for the purposes of Division 820.

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What this Determination is about

1. This Determination sets out how an entity must value its 'debt capital' for the purposes of Division 820 of the Income Tax Assessment Act 1997.

2. The concept of debt capital is used, among other things, to work out a non-ADI entity's 'adjusted average debt' for the purposes of the thin capitalisation rules in sections 820-85 and 820-185.

Ruling

3. Paragraph 820-680(1)(b) requires an entity to comply with the accounting standards in calculating 'the value of its liabilities (including its debt capital)'.

4. The debt capital of an entity at a particular time is defined in subsection 995-1(1) to mean 'any debt interests issued by the entity that are still on issue at that time'. A 'debt interest' in an entity has the meaning given in Subdivision 974-B.

5. An entity's debt capital must be valued in its entirety in the manner required by the accounting standards regardless of whether it comprises debt interests that are classified as financial liabilities, equity instruments or compound financial instruments under the accounting standards.

6. Pursuant to section 820-690, if the Commissioner considers that an entity has undervalued its debt capital in relation to a calculation under Division 820, the Commissioner may, having regard to the accounting standards and Subdivision 820-G, substitute a value that the Commissioner considers is appropriate.

7. The transfer pricing rules in Subdivision 815-B may also operate to substitute the arm's length conditions for the actual conditions that operate between an entity and another entity in connection with their commercial or financial relations, including in relation to the entity's debt capital.

Date of effect

18. This Determination applies 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 settlement of a dispute agreed to before the date of issue of this Determination (see paragraphs 75 to 76 of Taxation Ruling TR 2006/10 Public Rulings).