Debt or Equity - What’s it to be?

Co-written by John Wells

An overview of the rules for determining whether a membership interest in a company or an interest in a financing arrangement is a debt or equity interest for income tax purposes

The income tax law (‘Law’) provides different taxation outcomes for returns paid to Australian resident shareholders (‘shareholders’) and for returns paid to Australian residents who hold debt interests in entities (‘creditors’).

Returns paid to shareholders are taxed in the hands of those shareholders as dividends at a rate determined by each shareholder’s marginal tax rate. This rate of taxation may be reduced, however, if the shareholders can access franking rebates or credits in relation to those dividends.