Income Tax Act 2007 section 809BZJ

Type 3 finance arrangement defined

Section 809BZJ defines what constitutes a "type 3 finance arrangement" for the purposes of the disguised interest rules, where an existing partnership effectively borrows money by admitting a new partner whose profit share is linked to payments on a partnership asset.

• A type 3 finance arrangement applies where an existing partnership already holds an asset (the security), receives money or another asset (the advance) from a lender, undergoes a relevant change in its membership, and the new person's profit share is determined by reference to payments on the security.
• It differs from a type 2 finance arrangement in that the partnership must already exist before the arrangement — it cannot be one formed specifically for the purpose — and there is no requirement for a transfer of an asset or a transferor.
• The accounting condition (Condition B) requires that the partnership's accounts, prepared under generally accepted accounting practice, record a financial liability for the advance and that the payments linked to the profit share reduce that liability — in other words, they are treated as repayments of principal rather than interest.
• The reference to the partnership's accounts extends to include the accounts of any person who was a member of the partnership immediately before the arrangement was made, and it does not matter if the profit share determination is subject to any condition.