(c) the Commissioner considers that it would be unreasonable that a deduction be allowable to the taxpayer in respect of the value of the property to the extent to which, but for this subsection, a deduction would be allowable to the taxpayer in respect of the value of the property;
a deduction shall be allowable to the taxpayer in respect of the value of the property to the extent only that the Commissioner considers that it is reasonable in the circumstances that a deduction be allowable to the taxpayer in respect of that value.
(2B) Where:
(a) the value of any prescribed property that:
(i) was acquired by a taxpayer after 24 September 1978 and before the commencement of this subsection or is acquired after the commencement of this subsection; and
(ii) was or is used by the taxpayer in the carrying on or carrying out of any profit‑making undertaking or scheme;
would, but for this subsection, be taken into account for the purpose of ascertaining whether or not any profit arose, or any loss was incurred, from the carrying on or the carrying out of the undertaking or scheme and for the purpose of ascertaining the amount of any such profit or loss; and
(b) the Commissioner considers that it would be unreasonable that the value of the property be taken into account for those purposes to the extent to which the value would, but for this subsection, be taken into account for those purposes;
the value of the property shall be taken into account for those purposes to the extent only that the Commissioner considers that it is reasonable in the circumstances that that value be taken into account for those purposes.
(3) In forming an opinion for the purposes of subsection (1) or (2A) as to the extent to which it is reasonable that a deduction be allowable to a taxpayer in respect of expenditure incurred in the purchase or acquisition of prescribed property or in respect of the value of prescribed property, as the case may be, or in forming an opinion for the purposes of subsection (2) or (2B) as to the extent to which it is reasonable that expenditure incurred by a taxpayer in the purchase or acquisition of prescribed property should be taken into account for the purposes referred to in subsection (2) or that the value of prescribed property should be taken into account for the purposes referred to in subsection (2B), as the case may be:
(a) if the taxpayer expended moneys in purchasing or acquiring the prescribed property—the Commissioner shall have regard to the circumstances in which, and the person or persons from whom, the taxpayer obtained moneys:
(i) that were expended by the taxpayer in purchasing or acquiring the prescribed property; or
(ii) that, in the opinion of the Commissioner, were obtained by, or paid to, the taxpayer to enable the taxpayer to expend moneys in purchasing or acquiring the prescribed property;
(b) if the taxpayer borrowed from another person (in this paragraph referred to as the lender) moneys that were expended by the taxpayer in purchasing or acquiring the prescribed property or moneys that, in the opinion of the Commissioner, were obtained by, or paid to, the taxpayer to enable the taxpayer to expend moneys in purchasing or acquiring the prescribed property—the Commissioner shall have regard to:
(i) the circumstances in which, and the terms and conditions on which, the taxpayer borrowed those moneys from the lender; and
(ii) whether, in the opinion of the Commissioner, the taxpayer and the lender were dealing with each other at arm’s length in connexion with the borrowing of those moneys by the taxpayer;
(c) if, either before or after the purchase or acquisition of the prescribed property by the taxpayer, an agreement or arrangement (whether or not enforceable by legal proceedings and whether or not intended to be so enforceable) was entered into, or an understanding was reached, as a result of which there has been, or there could reasonably be expected to be, a substantial reduction in the value of the prescribed property—the Commissioner shall have regard to that agreement, arrangement or understanding;
(d) if the purchase or acquisition of the prescribed property by the taxpayer arose out of, or was made in the course of, a transaction, operation, undertaking, scheme or arrangement that was entered into or carried out for the purpose, or for purposes that included the purpose, of securing that a person who, if the transaction, operation, undertaking, scheme or arrangement, had not been entered into or carried out, would have been liable to pay income tax in respect of a year of income would not be liable to pay income tax in respect of that year of income or would be liable to pay less income tax in respect of that year of income than that person would have been liable to pay if the transaction, operation, undertaking, scheme or arrangement had not been entered into or carried out—the Commissioner shall have regard to that transaction, operation, undertaking, scheme or arrangement;
(e) if the purchase or acquisition of the prescribed property by the taxpayer arose out of, or was made in the course of, a transaction, operation, undertaking, scheme or arrangement that the Commissioner is satisfied was by way of dividend stripping or was similar to a transaction, operation, undertaking, scheme or arrangement by way of dividend stripping—the Commissioner shall have regard to that transaction, operation, undertaking, scheme or arrangement;
(f) if:
(i) the purchase or acquisition of the prescribed property by the taxpayer arose out of, or was made in the course of, a transaction, operation, undertaking, scheme or arrangement under which, or in the course of which, money was to be paid, or other property was to be transferred or made available by a person other than the taxpayer, whether before or after the purchase or acquisition of the prescribed property, to the taxpayer, to the taxpayer and a person or persons other than the taxpayer or to a person or persons other than the taxpayer;
(ii) the Commissioner is satisfied that the amount of money so to be paid, or the value of the property so to be transferred or made available, as the case may be, was to be not less than, or not substantially less than, the amount expended by the taxpayer in the purchase or acquisition of the prescribed property;
the Commissioner shall have regard to the fact that the purchase or acquisition of the prescribed property by the taxpayer arose out of, or was made in the course of such a transaction, operation, undertaking, scheme or arrangement;
(g) if the purchase or acquisition of the prescribed property by the taxpayer arose out of, or was made in the course of, a transaction, operation, undertaking, scheme or arrangement under which, or in the course of which, other prescribed property was to be issued or allotted by a company (whether to the taxpayer or any other person or persons) and it could reasonably be expected that, as a result of the issue or allotment of that other prescribed property, the value of the prescribed property purchased or acquired by the taxpayer would be substantially reduced—the Commissioner shall have regard to that transaction, operation, undertaking, scheme or arrangement;
(h) if the purchase or acquisition of the prescribed property by the taxpayer arose out of, or was made in the course of, a transaction, operation, undertaking, scheme or arrangement under which, or in the course of which, rights in respect of the prescribed property or in respect of other prescribed property (whether that other prescribed property had been issued or allotted before the time of the purchase or acquisition by the taxpayer of the first‑mentioned prescribed property or was to be issued or allotted at a later time) were to be withdrawn or varied and it could reasonably be expected that, as a result of a withdrawal or variation of those rights, the value of the prescribed property purchased or acquired by the taxpayer would be substantially reduced—the Commissioner shall have regard to that transaction, operation, undertaking, scheme or arrangement; and
(j) the Commissioner shall have regard to any other matters that he or she considers relevant.
(4) In this section, prescribed property means any chose in action.
(4A) In the preceding provisions of this section, references to the value of any prescribed property shall, unless the contrary intention appears, be read as including references to part of the value of that prescribed property.
(5) For the purposes of this section:
(a) a person to whom prescribed property is issued or allotted by a company shall be taken to have acquired that prescribed property;
(b) a person upon whom prescribed property devolves by reason of the death of a person shall be taken to have acquired that prescribed property; and
(c) a person in whom prescribed property vests by the operation of any trust or the exercise of any power under a trust shall be taken to have acquired that prescribed property.
(6) The reference in paragraph (3)(b) to terms and conditions shall be read as including a reference to implied terms and conditions and to terms and conditions that are not enforceable by legal proceedings whether or not they were intended to be so enforceable.
(7) Where, by virtue of the application of the preceding provisions of this section, the amount (in this subsection referred to as the relevant amount) of the deduction that is allowable to a taxpayer in respect of losses or outgoings incurred by the taxpayer in the purchase or acquisition of prescribed property is less than the amount of those losses and outgoings, the cost of that prescribed property shall, for the purposes of the application of Divisions 70 (Trading stock) and 385 (Primary production) of the Income Tax Assessment Act 1997 in relation to that property in relation to the taxpayer, be taken to be an amount that is the same as the relevant amount.
(8) References in this section to expenditure incurred by a taxpayer in the purchase or acquisition of any prescribed property shall, in the case of prescribed property being a share or stock in the capital of a company, be read as including references to any payment made or other consideration given by the taxpayer to the company in respect of the prescribed property, whether as a payment of unpaid capital in respect of the prescribed property or otherwise and whether on application for or allotment of the prescribed property, to meet calls or otherwise.
(9) Subsection (8) applies to a non‑share equity interest in the same way as it applies to a share.
63 Bad debts
Where a debt in respect of the whole or a part of a payment that has, or will, become liable to be made under a qualifying security within the meaning of Division 16E is written off as a bad debt by a taxpayer during a year of income, then, for the purposes of paragraph 25‑35(1)(a) of the Income Tax Assessment Act 1997, there is taken to have been included in the taxpayer’s assessable income of a year of income so much of the debt as equals the amount (if any) ascertained in accordance with the formula A – B, where:
A is the amount (if any) or the sum of the amounts (if any) included in the assessable income of the taxpayer of any year or years of income under section 159GQ that is or are attributable to the payment or to the part of the payment, as the case requires; and
B is the amount (if any) or the sum of the amounts (if any) allowable as a deduction or deductions from the assessable income of the taxpayer of any year or years of income under section 159GQ that is or are attributable to the payment or to the part of the payment, as the case requires.
63D Bad debts etc. of money‑lenders not allowable deductions where attributable to listed country or unlisted country branches
(1) Subject to section 63F, if:
(a) apart from this section and section 63F, a deduction would be allowable to a taxpayer:
(i) under section 8‑1 or 25‑35 of the Income Tax Assessment Act 1997 in respect of the writing off of a debt as bad; or
(ii) under section 63E of this Act in respect of a debt/equity swap in relation to a debt; and
(b) the debt was created or acquired in the ordinary course of a money‑lending business of the taxpayer who carries on that business; and
(c) during any part or parts (the foreign country branch period) of the period since the debt was so created or acquired (the debt holding period), it is the case that, if income had been derived by the taxpayer in respect of the debt, the income would not, because of section 23AH of this Act, have been included in the assessable income of the taxpayer;
then only a proportion of the deduction is allowable, being the proportion calculated using the formula:
Start formula start fraction Debt holding period minus Foreign country branch period over Eligible debt term end fraction end formula
where:
debt holding period means the number of days in the debt holding period.
eligible debt term means:
(a) where the debt was acquired from a person other than an associate, within the meaning of section 318 of this Act—the number of days in the debt holding period; or
(b) in any other case—the number of days in the period beginning on the day on which the debt was created (whether by the taxpayer or another person) and ending at the end of the day on which it was written off.
foreign country branch period means the number of days in the foreign country branch period.
(2) Where a debt that is written off, or in respect of which there is a debt/equity swap (within the meaning of section 63E), was acquired from another person, the creation, and any previous acquisition, of the debt is to be disregarded for the purposes of applying subsection (1), other than paragraph (b) of the definition of eligible debt term in subsection (1).
(3) Where a part of a debt is written off as bad, this section applies as if the part were an entire debt that is written off as bad.
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
(b) if the consideration received or receivable by the taxpayer in respect of the disposal, cancellation or redemption is different from the equity value of the shares or units:
(i) if the consideration is greater—the difference is included in the taxpayer’s assessable income of the year of income in which the disposal, cancellation or redemption occurs; or
(ii) if it is less—the difference is allowable as a deduction from that assessable income.
Consideration of a nil amount
(5) For the purposes of subsection (4), if no consideration is received or receivable by the taxpayer in respect of the disposal, cancellation or redemption, then consideration of a nil amount is taken to have been so received or receivable.
(5A) Subdivisions 165‑C, 166‑C and 175‑C of the Income Tax Assessment Act 1997 apply to an allowable deduction under this section in respect of the whole or part of a debt that is extinguished, in the same way as they apply to a debt (or part of a debt) that is written off as bad.
Meaning of arrangement
(6) In this section:
arrangement means any agreement, arrangement, understanding, promise, undertaking or scheme, whether express or implied, and whether or not enforceable, or intended to be enforceable, by legal proceedings.