63EDebt/equity swaps

63E  Debt/equity swaps

Meaning of debt/equity swap

 (1) For the purposes of this section, a debt/equity swap occurs if:

 (a) under an arrangement (defined in subsection (6)), a taxpayer discharges, releases or otherwise extinguishes the whole or part of a debt owed to the taxpayer in return for the issue by the debtor to the taxpayer of shares (other than redeemable preference shares), or units, in the debtor; and

 (b) the debtor is:

 (i) a company; or

 (ii) a trading trust (within the meaning of section 102N), or a public unit trust (within the meaning of section 102P), in relation to the year of income in which the units are issued; and

 (c) the debt either:

 (i) has been brought to account by the taxpayer as assessable income of any year of income; or

 (ii) is in respect of money lent in the ordinary course of the business of the lending of money by the taxpayer who carries on that business.

Meaning of equity value and swap loss

 (2) For the purposes of this section:

 (a) the equity value of the shares or units is the greater of:

 (i) their market value at the time of their issue to the taxpayer; and

 (ii) their value shown in the accounts of the taxpayer as at the time of their issue to the taxpayer; and

 (b) a swap loss occurs if the amount of the whole or the part of the debt that is extinguished is greater than the equity value of the shares or units.

Swap loss is deductible etc.

 (3) If a debt/equity swap occurs:

 (a) subject to section 63F, any swap loss is allowable as a deduction from the taxpayer’s assessable income of the year of income in which the shares or units are issued; and

 (b) no amount is allowable as a deduction from the assessable income of the taxpayer of any year of income under section 8‑1 or 25‑35 of the Income Tax Assessment Act 1997 in respect of the writing off of the whole or part of the debt as bad in connection with the debt/equity swap; and

 (c) for the purposes of any application of Subdivision 20‑A of the Income Tax Assessment Act 1997 in relation to the issue of the shares or units to the taxpayer, the amount received in respect of the issue is taken to be the same as the equity value of the shares or units.

Effect of debt/equity swap on later equity disposal etc.

 (4) If a debt/equity swap occurs and the taxpayer later disposes of any of the shares or units or they are cancelled or redeemed:

 (a) except in accordance with paragraph (b), no amount is included in, or allowable as a deduction from, the taxpayer’s assessable income of any year of income under this Act in respect of the later disposal, cancellation or redemption; and