Section 820-39 provides an exemption from the application of the thin capitalisation provisions if the entity meets the following conditions:
- the entity is established for the purpose of managing some or all of the economic risk associated with assets, liabilities or investments (whether the entity assumes the risk from another entity or creates the risk itself)
- the total value of debt interests in the entity is at least 50 percent of the total value of the entity’s assets
- the entity is an insolvency remote special purpose entity according to criteria of an internationally recognised rating agency that are applicable to the entity’s circumstances.
Following comments received as part of the public consultation process for TD 2012/D11: Income Tax: Does subsection 820-39(3) of the Income Tax Assessment Act 1997 only apply to special purpose entities that have been established for the purpose of carrying on securitisation activity?, the Commissioner has confirmed that subsection 820-39(3) is not limited to securitisation in the way suggested in the draft Determination.
TD 2012/D11 has since been withdrawn and is expected to be reissued to consider insolvency remote special purpose entities used in project finance transactions. For example, entities that satisfy Standard & Poor’s Criteria For Special Purpose Entities in Project Finance Transactions”.
In our experience, financiers will require the financing vehicle to obtain an Australian Taxation Office (ATO) private binding ruling if the financing vehicle intends to rely on the exemption from thin capitalisation under Section 820-39. KPMG has extensive experience in assisting clients obtain positive ATO rulings under section 820-39.