Base price adjustment calculation
IT07 ss EW 31, EW 47, EZ 52D, YA 1
The base price adjustment formula for a party to a financial arrangement is incorporated in the following formula:
consideration − income + expenditure + amount remitted
where:
consideration
is all consideration that has been paid, and all consideration that is or will be payable, to the person for or under the financial arrangement, … minus all consideration that has been paid, and all consideration that is or will be payable, by the person for or under the financial arrangement (ignoring non-contingent fees, if the relevant method is not the IFRS financial reporting method and non-integral fees, if the relevant method is the IFRS financial reporting method)
Note that if any of ss EW 32 to EW 48 or EZ 52D applies, the consideration is adjusted under the relevant section.
income
is income derived by the person under the financial arrangement in earlier income years; dividends derived by the person from the release of the obligation to repay the amount lent; and any suspensory loan remission
expenditure
is expenditure incurred by the person under the financial arrangement in earlier income years, and
amount remitted
is any amount that is not included as part of the consideration which has been remitted by the person or by operation of law.
An amendment applies from 26 September 2010 to adjust the consideration for financial arrangements to which both Determination G22 and Determination G22A (optional convertible notes) apply, so that any deductions claimed under Determination G22 are not clawed back: s EZ 52D. See also ¶6-218.
A non-contingent fee is a fee for services provided for a person becoming a party to a financial arrangement and that is payable irrespective of whether the financial arrangement proceeds. A non-integral fee is a fee or transaction cost that, for the purposes of financial reporting, is not an integral part of the effective interest rate of a financial arrangement.
The deduction under the income item for a company releasing a debt owed to it by a shareholder ensures that there is no double taxation of the release. The release is a dividend and not also financial arrangement income under the base price adjustment.
To calculate a base price adjustment for a financial arrangement, it is necessary to take into account the consideration payable under the financial arrangement. The topic of consideration is addressed in considerable detail by the financial arrangements rules. Specific aspects that are discussed are the following:
▪ consideration paid to a person upon exit from and entry into the financial arrangements rules together with a disposal for inadequate consideration: see ¶6-370
▪ consideration paid by a person upon entry into and exit from the financial arrangements rules together with an acquisition for inadequate consideration: see ¶6-380
▪ consideration under an agreement for the sale and purchase of property or services or a specified option: see ¶6-400
▪ consideration under a debt-parking arrangement: see ¶6-410
▪ consideration where debt is released for natural love and affection: see ¶6-420
▪ consideration upon a release of debt by statute: see ¶6-430.
The calculation will produce an amount that is nil, positive or negative. The consequences are the following:
▪ a positive amount is income derived except to the extent of non-deductible expenditure under the financial arrangement in previous income years (see ¶5-263)
▪ a negative amount is expenditure incurred for which a deduction is allowed (see ¶10-452), and
▪ a nil amount is neither income nor a deduction.
Example:
A Co issues B Co with a five-year debenture with a face value of $30,000 for $30,000. The stock pays 8% in arrears. Financial arrangement income and expenditure on a yield to maturity basis is $2,400 per annum. In the middle of the term of the stock, and before the interest payment is made in the third year, B Co sells the stock to a third party. The value of the stock has declined to $27,000, as general interest rates have risen. The base price adjustment for B Co will be:
consideration − income + expenditure + amount remitted
determined as follows:
▪ consideration = $1,800, being $27,000 plus the interest income for the past two years of $4,800 less the $30,000 lent by B Co
▪ income = $4,800, the income derived in previous years
▪ expenditure = nil, and
▪ no amount has been remitted.
The base price adjustment for B Co is:
$1,800 − $4,800 + $0 + $0 = ($3,000)
The negative amount is expenditure incurred. B Co will have an allowable deduction, because the ($3,000) arises from income derived by B Co in previous years, which is not otherwise allowed as a deduction.
For A Co, when the financial arrangement matures after six years, the base price adjustment will be as follows:
▪ consideration = ($14,400), being the $30,000 paid to A Co less the $14,400 paid by A Co in interest less the $30,000 paid by A Co
▪ income = nil
▪ expenditure = $12,000 (five years × interest of $2,400 pa), the amount incurred by A Co in previous years, and
▪ no amounts have been remitted.
The result for A Co is:
($14,400) − $0 + $12,000 + $0 = ($2,400)
The negative amount is expenditure incurred for which a deduction is allowed.
The position of the creditor under the financial arrangement that is subject to the legal defeasance is also addressed. It is confirmed that when the creditor comes to calculate the base price adjustment, the calculation must include the consideration received from the party who assumed the obligations of the original debtor. As a consequence, the consideration for the purposes of the calculation encompasses what was received from both debtors. See s EW 47.
One objective of calculation of the base price adjustment appears to be to identify as income, in the hands of a debtor, the amount of any release of debt.
Example:
PR Ltd has a debt of $300,000 owed to LO Ltd but is unable to repay the debt in full. PR Ltd arranges a payment of 50¢ in the dollar in full and final satisfaction of the debt. PR Ltd must calculate a base price adjustment to identify any financial arrangement income now that the financial arrangement has matured according to the settlement agreement.
Calculation of the base price adjustment for PR Ltd is as follows:
consideration − income + expenditure + amount remitted
where:
▪ consideration = the consideration paid or payable by PR Ltd (now $150,000) less the consideration paid by LO Ltd ($150,000) = 0
▪ income = 0
▪ expenditure = 0, and
▪ amount remitted = $150,000.
The result of $150,000 is financial arrangement income for PR Ltd.
There are exceptions to an outcome of this kind. The release of debt in consideration of natural love and affection and upon discharge from bankruptcy does not result in financial arrangement income.
The release of debt also raises gift duty implications. Where the release occurs in the context of a debtor who is insolvent, there may be no inadequacy of consideration that attracts gift duty. The release confers no benefit on the debtor, because the insolvency indicates that there is no capacity to repay.
Public binding ruling BR Pub 10/21, “Interest repayments required as a result of the early repayment of a financial arrangement — deductibility”, addresses when a base price adjustment is required where the amount of interest paid is reduced as a result of the early repayment of a financial arrangement. Where there is a full withdrawal of the term deposit before contract maturity, a base price adjustment is required and the amount of interest repaid is included in the “consideration” element of the base price adjustment. Where there is a partial withdrawal of a term deposit, a base price adjustment is not required. The ruling applies from 16 December 2010 to 16 December 2013.
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