Facts
Discuss about the Statement Of Facts, Issues and Contentions for Holdco Pty. Ltd.
The facts of the current case are as follows:
- The holding company that is Holdco Pty. Ltd. is holding 100% shares in the subsidiary Subco. The company is operating within the country with the help of the subsidiaries that are being held by the holding company. The subsidiary is conducting its operation in the oil and gas exploration activities.
- The holding company has not decided to operate as a consolidated company or group.
- Due to this fact the holding and the subsidiary company will be treated as separate entities.
- The holding company i.e. Holdco has engaged itself in the borrowing of $3 billion from a finance company called as Finch. The amount that has been borrowed by the company is carrying an interest element of around 9%.
- The holding company has issued the loan to the subsidiary company Subco at an interest free term.
- The reason for giving the amount to the subsidiary was to ensure that the same is being utilized for the purpose of carrying out the business activities of the company.
- It is seen that as on 30thof June 2015 the company has incurred interest expenditure to the tune of $270 million.
- The holding company is claiming the same to be deductible from the income that is being earned by the company.
- The deduction that is being claimed by the company is in accordance with the provisions that are being laid down by the statute in the section 8-1 of the Income Tax Assessment Act 1977 (gov.au, 2018).
- The holding company is in full compliance with the various interest withholding tax obligations.
- It has also been clearly established that Subco has not paid any sort of dividend to Holdco for the year ended 30thJune 2015.
- It is also seen that Subco is not yet profitable.
- Issues
The issue in respect of which the statement is being issued is regarding the interest that has been expended by the company for the tax year. The deduction of the same has not been allowed by the commissioner on the following grounds:
- He is of the opinion that the principle amount of the loan has to been utilised for the purpose of carrying out the principle revenue generating activity of the company.
- The amount of expenditure in respect of the interest amount of the company has been considered to be of capital in nature or capital all by itself.
- Contentions
To determine the deductibility of the amount of interest that is to be paid by the company the reference pf the various rules and regulations laid out in the section 8-1 of the Income tax Assessment act have been objectively observed, complied with and implemented:
The wordings that have been laid down in the section in respect of the same are as follows:
- The amount has been incurred by the taxpayer for the purpose of gaining or producing assessable income. In addition to that the amount that has been expended by the company is not of capital nature, is a loss, or of a capital, is of private or of domestic in nature (King, 2016).
- The amount that has been incurred by the taxpayer has been incurred on a necessary basis for the purpose of carrying out of the business that is solely responsible for the purpose of generation of assessable income for the taxpayer. In addition to that the loss or the outgoing is not of capital nature or of a capital or is of private or domestic in nature.
In addition to the above mentioned condition there are several other cases that have been illustrated by the statute for the purpose of ascertaining the whether or not the outgoing capital or the loss that has been borne by the company for the relevant tax year is deductible or not by satisfying all the requirements that are being laid down in the section 8-1 of the ITAA. The cases are as follows:
- The interest expense that have been incurred by the entity must have direct connection with the various operations or the activities that more directly gain or produce the assessable income of the taxpayer and not be of capital, private or domestic in nature. The test that is being taken for the purpose of ascertainment of the same is a test of character and the question that is being answered is in respect of the question that whether all the circumstances have been factored in for the purpose of ascertainment of the result of the test that is being taken (Yu & Halog, 2015).
- It is a general principle that the character of the interest of the money is ascertained based on the reference to the objective circumstances of the use to which the borrowed funds are being put by the borrower. However proper consideration must be given to all the circumstances including the nature of the business that is being carried out by the taxpayer, the main purpose of the borrowed funds, and the nature of the series of transaction of which the borrowed funds have become an element. There are some cases wherein the subjective purpose, intention, or motive may be considered relevant for the purpose of deciding the deductibility of the interest amount from the assessable income of the taxpayer.
- The presence of a trail that will establish the relationship between the borrowed money and the principle revenue generating activity of the company. The reason for its presence is that the same will demonstrate a relevant connection between the interest on the amount that has been borrowed by the entity and the principle income producing activity. The approach is generally adopted for the non-business taxpayers. The same can be applied to those cases too where in the amount that is borrowed by the company are directly channelized to a specific purpose like the structure of the business. One example could be that an entity engages in the arranging of huge funds for the purpose of transacting an offshore acquisition.
- It is not always appropriate or necessary to conduct a tracing of the borrowed money. The main consideration in such cases will have to be given on the ascertainment of the fact that whether the funds that have been borrowed by the entity are being used for the purpose of replacing the funds that were acquired for other source of funds for the purpose of business.
- The interest on the amount of borrowed funds will not be deductible just because the same has been utilized for the purpose of preserving the assessable income producing assets of the company.
- Interest on the amount that has been borrowed by the entity for the purpose of carrying out the business of the entity will not be deductible by the entity if the same are not utilised for the purpose of business or the income producing activity of the entity.
- The amount of the interest that is incurred by the entity will not be allowed as deduction the extent the same is being utilised for the purpose of private or domestic purposes, gaining or producing income that is exempt in nature.
It has to be objectively understood that the prime reason for the making available capital to the subsidiary company by the holding company is to ensure that the same is able to carry out its business activities. It is also important to make available the funds for ensuring that the subsidiary company while performing the various business activities is not faced with the challenge of capital requirement. Hence it can be objectively analysed that the amount that has been borrowed by the holding company has been used up by the subsidiary company for the purpose of business activities only. Therefore the subsidiary company has been able to fulfil the condition that was being laid down in the statute that the amount that is being borrowed for which the company is claiming the corresponding interest must be utilised for the purpose of business. It has to be noticed that the condition has been fulfilled even if the activities have not been directly performed by the holding company directly but the same have bene conducted by the subsidiary company.
The interest that has been incurred by the holding company in respect of the funds that has been borrowed by it from the finance company is in respect of the business that is to be carried out by the subsidiary. The reason for the same is that the it would have not been possible for the entity to carry out its activities without the financial assistance that was received by it from the holding company (Lal et al., 2017).
Issues
Numerous amount of factors and the circumstances have to be kept in mind for the purpose of ascertainment of the nature of the amount of interest that is being paid by the entity. Among the various uses to which the funds are put to use by the entity the ultimate utilisation of the funds that have been arranged by the entity has to be ensured. After the nature of the amount that has been arranged by the entity has been adjudged, it was found that the same was being used for the purpose of carrying out the various business activities. Therefore, the amount that has been borrowed by the holding company and the corresponding interest that has to be paid by it to the company from which it has borrowed the money should be allowed as deduction.
In addition to that tracing has been conducted in respect of the amount that has been borrowed by Holdco Pty. Ltd. to Subco. Pty. Ltd. The conclusion of the tracing pf the amount borrowed by the company has ensured that the same has been utilised for the purpose of carrying out the various economic activities of the entity.
As the amount that has been borrowed by the company is utilised for the purpose of carrying out the various business activities of the entity as is ascertained from the tracing of the funds of the company, the same has not been utilised for the purpose of preservation of the assets of the company. Therefore, doesn’t violate the rule that has been stated out in the section 8-1 of the Income Tax Assessment Act 1977 (Cobiac et al., 2017).
The subsidiary company has not discontinued making use of the funds that were made available to it by the Holding company. The reason being that the funds were continuously being utilised for the purpose of carrying pout the various business activities of the entity. Due to the fact that the principle amount has been continuously being utilised for the purpose of carrying out the business activity of the entity, the interest pertaining to the same will also be considered to be continuously utilised for the purpose of carrying out various business activities. This suggests that the same has not ceased in being utilised for the purpose of carrying out the business activities.
Furthermore, the interest that is being incurred on the part of the company has not been utilised for the purpose of any sort of domestic or private use. The same amount is also not in the nature of the capital or is not capital in itself. In addition to that the principle amount corresponding to the amount of interest incurred by the holding company for the relevant year has not been utilised for the generation of any sort of income that is exempt in nature. Hence the deduction in respect of the interest expenditure must be made available to the entity (McGee, Devos & Benk, 2016).
- Extension of time
- Annexures
This statement of facts, issues and contentions is put forward in accordance with the instructions of the appellant, (name), and it complies with the Supreme Court Civil Rules 2006.
Date:
References:
Cobiac, L. J., Tam, K., Veerman, L., & Blakely, T. (2017). Taxes and subsidies for improving diet and population health in Australia: a cost-effectiveness modelling study. PLoS medicine, 14(2), e1002232.
King, A. (2016). Mid market focus: The new attribution tax regime for MITs: Part 1. Taxation in Australia, 50(10), 590.
Lal, A., Mantilla-Herrera, A. M., Veerman, L., Backholer, K., Sacks, G., Moodie, M., … & Peeters, A. (2017). Modelled health benefits of a sugar-sweetened beverage tax across different socioeconomic groups in Australia: A cost-effectiveness and equity analysis. PLoS medicine, 14(6), e1002326.
Legislation.gov.au. (2018). Legislation.gov.au. Retrieved 18 June 2018, from https://www.legislation.gov.au/Details/C2017C00336
McGee, R. W., Devos, K., & Benk, S. (2016). Attitudes towards tax evasion in Turkey and Australia: A comparative study. Social Sciences, 5(1), 10.
Yu, M., & Halog, A. (2015). Solar photovoltaic development in Australia—a life cycle sustainability assessment study. Sustainability, 7(2), 1213-1247.
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