Income Tax Act 2007 section 809BZA

Type 1 finance arrangement defined

Section 809BZA defines what constitutes a "type 1 finance arrangement" — a specific type of structured transaction where an advance of money or assets is secured against a transferred asset, and the accounting treatment reflects a loan-like financial liability.

• A type 1 finance arrangement requires two conditions (A and B) to be met: the arrangement must involve an advance from a lender to a borrower, a disposal of a security asset to or for the benefit of the lender, and an entitlement to payments on that security
• The lender's entitlement to payments on the security counts even if it is subject to conditions, and ordinary secured loans typically fall outside this definition because they do not involve a disposal of an asset to the lender
• Under generally accepted accounting practice, the borrower's accounts must record a financial liability for the advance, and the payments in respect of the security must reduce that liability — meaning they are treated as repayments of principal rather than interest
• Where the borrower is a partnership, the accounts of any individual partner can satisfy the accounting condition, and for the purposes of this definition the borrower and the lender are not treated as connected with one another