Identifying Hybrids in Australia: Comparing the TOFA Debt and Equity Rules and AASB 132 for a Definition of Shareholding
Journal of Law and Financial Management, Vol. 9, No. 1, pp. 2-13, June 2010
17 Pages Posted: 13 Feb 2011
Date Written: February 10, 2011
Abstract
When corporations require financing, there are typically two methods - debt and equity. The return from debt financing is interest, which gives rise to a tax deductible expense for the company issuing the debt. Equity financing returns dividends, which are non-tax-deductible distributions of profit. Corporations may issue hybrid securities such as preference shares, convertible notes, profit sharing loans and perpetual loans for profit maximisation and tax minimisation. In turn, the holders of financial instruments may, for purposes such as tax planning, assign rights from an instrument, which may change the nature of the instrument and consequently, the relationship of the holder to the corporation. This paper is a comparative study of debt and equity rules in the Taxation of Financial Arrangements (TOFA) regime in Division 974 of the Income Tax Assessment Act 1997 (ITAA 1997) and the provisions in AASB 132. The focus of this study is to look at instruments that are either in form or in substance equity and their different treatments under accounting and tax rules in Australia, thereby identifying a more appropriate definition of shareholding for businesses to comply with in Australia.
Keywords: finance, law
JEL Classification: M40, M41
Suggested Citation: Suggested Citation