Debt & Equity
The New Business Tax System (Debt and Equity) Act 2001 determines what is equity in a company and what is debt in an entity for tax purposes with effect from 1 July 2001.The debt and equity rules aim to improve certainty in the tax law by establishing tests that provide a clearer and more coherent distinction between equity and debt interests. The major impact will be on financial institutions, life insurers, superannuation funds and large corporates. Small business and individuals are affected to a lesser extent.
The tests for debt and equity interests determine whether a particular interest is a debt interest or an equity interest. The law:
- identifies when a scheme gives rise to a debt interest as distinct from an equity interest
- is used to identify debt for thin capitalisation purposes, and
- is also used to identify debt for the consolidation measure.
The debt and equity tests determine whether a return on an interest in an entity may be frankable and non-deductible, or may be deductible to the entity and not frankable. To find out more information on this matter contact East Maitland Accounting.
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